COST, PRICE AND VALUE
It is often said that an accountant knows the cost and price value of everything but value of nothing. However, an expert accountant also knows the value of those things of which he is aware about cost and price. So if I would say anyone who knows cost and price of something only knows about the value of it. Surprised? Let us try to understand it.
What is Cost?
Cost is the amount spent for creating and delivering the product or service to its end user.
What is Price?
Price is the amount charged from the end user for the product or service delivered.
What is Value?
Value is nothing but price that end user thinks is the right price for the product or service delivered. It means the customer perception price is value.
So how does cost, price and value affect business growth?
When customer or end user finds that value of the product or service is much more than the price offered – he takes no time in paying for the product or service. It means if our product or service has lesser price than the customer thinks then it is more likely that it will be sold faster.
So the management challenges are –
- To keep costs to minimum level where benefits derived from spending it are maximum and quantum of cost is minimum. Sometimes, one does not understand difference between cost reduction and cost control. We incur cost to derive benefit and hence we must do cost benefit analysis. Cost Reduction – Cost Control – Cost Benefit Analysis is a separate discussion and will be discussed later on.
- Setting up the right price. Price is extremely important aspect for business as it has to balance upon cost as well as value. Target Consumer’s ability and willingness to pay, cost of resources and operations to generate product or services, volume of sales are the major factors for setting up price. How to set up price of product or service, is also a fundamental factor affecting business survival and growth. Therefore, price setting is a separate discussion and will be discussed later on.
- How to maximize value i.e. creating the perception in the minds of customer that price that is set is lower than the value created by the product or service. Usually, value creation involves – Idea, execution and communication. It means value perception depends upon the idea of business or deliverables, how well it is executed and how well it is communicated to the target consumers. Usually, it is observed that cost spending on idea, execution and communication is highly imbalanced and therefore, either of business idea or execution or communication is great the other aspects are neglected due to paucity of funds and business does not grow or even does not survive.
As SME owners, are we ready to give a deep thought on cost optimization, effective price setting and creating a strong value proposition, backed by a progressive action plan? If yes then what are you waiting for – start the journey of “UNDERSTANDING BUSINESS WITH NUMBERS”. Whom are you waiting for? Log on to happybalancesheet.com or download the app – hbs and learn 7 Secrets of Happy Balance Sheet.