Rethinking Price, Cost & Value: What They Don’t Teach You in Business School
What is the price of something or rather how do you define the price of something when you make a purchase or sell a product or service? In your opinion what is the cost of a product or service? Do all businesses define cost the same way or is cost merely the wholesale price of producing or manufacturing particular goods or services? Finally, how should the value of a product or service be calculated; what is value anyway?
Let’s start with price; when asked or pressed for an answer how would define price? Is the price what something is worth? Is it what someone is willing to pay? Is the price what someone expects to get for a product or service? Is it the cost plus profit? Is it a combination of these exactly what is “The Price”? Well, if your answer is “None of the above you are absolutely correct” because price is indeed none of the above. At the end of the day price is really nothing more than what someone is asking for a product or service expressed in numerals, decimals or percentages, that’s it. The next time you see a price think of it merely as a numeral, decimal or a percentage, not what the product or service is worth.
Conversely, if you are selling goods or services you should anticipate that your price is going to be challenged by your clients and customers and by your competition; so to protect your bottom line you should build flexibility into your pricing model by raising your expectation, in other words ask for more than you expect to get and certainly ask for more than you need to get, that way you will have an opportunity to substantiate your benefits, establish the value of your goods and services and by doing so, create more revenue. At the end of the day “The Price” is nothing more than numerals, decimals or percentages.
What about cost? Is the cost what the wholesaler paid for the product? Is it what the product is worth? Is it what the wholesaler paid plus profit? What is the cost of a product or service? The answer depends on who is answering. Sometimes the cost of something is what the wholesaler paid for the product.
Sometimes it isn’t. Ultimately the answer will depend on how or who is making the determination because every business answers this question differently. However the thing that many businesses and organizations fail to recognize is that the true cost of anything always includes a great deal more that its wholesale cost, the real cost comes down to a single word; Liability. Cost rarely refers to just what something costs in terms of dollars and cents; cost also includes the intangible variables associated with its acquisition. Variables such as time (When does the purchaser need the product or service, how much time does the seller have to sell?), risk (What are the risks if the purchaser doesn’t purchase the product or service? What happens if the seller doesn’t sell?), want (How much does the purchaser want the product or service?), and finally, demand (What is the demand for a product or service relative to its real or perceived availability?). All these factors are part of the true cost of anything but often these variables are ignored. Cost then, refers to anything tangible or intangible that is a liability. Cost equals liability.
So then what is value? How many times have you heard someone say that a product or service is a good value because it has a retail price of a thousand dollars say, but is now discounted down to six-hundred and fifty dollars? A million times right? The question is this, is value merely the difference between one price and another? The answer is No. Value has nothing to do with price and nothing to do with cost. Value is ultimately determined by measuring the tangible and intangible Benefits of goods or services over their tangible and intangible Costs or Liability. In other words, Benefit over Liability equals: Value; where value is established, price often does not dictate whether or not someone will buy a particular product or service. Take the price of a gallon of water in the desert versus the price of a barrel of oil? Which has more value to someone who is thirsty?
By integrating these principals into your sales and purchasing strategies you’re going to increase your sales revenue and reduce your costs immediately.
Derrick Chevalier is the Ex. VP of Harrison-Chevalier, Inc. an internationally acclaimed business skills & negotiation training and consulting firm located in Los Angeles with over 20 years experience with companies and clients from throughout The United States, Canada, Mexico, Africa, The Carrabin and elsewhere. He is the author of four books including: Beyond Negotiating: From Fear to Fearless, Influence-Rapport-Results, ROADMAP to Success with Dr. Steven Covey and Dr. Ken Blanchard and the upcoming All Assumptions Are Wrong.
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