In buying and selling we could as buyers or sellers, depending on the role you are playing, get caught up in the financial numbers. This is why you need to understand the difference between price and cost because confusing one with the other will have a big impact down the line.
What is the difference between price and cost?
As a buyer when talking about cost you need to know that cost refers to the total sum involved in whatever it is that you are buying including all expenditure associated with ownership and use of the product or service, including the price.
Price unlike cost is the amount of consideration to be to be paid or given to a supplier for an article, goods or service or for something desired, offered or purchased.
In its simplest form, price is basically the supplier or seller-stated value of a product or service measured in monetary form.
The customer’s view point of value regarding the same product or service may differ from that of the seller, the customer will look at it in terms of utility level assumed to be achieved from ownership of that product of service.
While price and cost may seem related there is a need for one to learn the difference. Among other aspects the chief difference is in perception of value. When determining value, one has to take into consideration the optimum combination of whole-life cost and quality necessary to meet their requirements
Buyer’s perception about price
Buyers tend to be naturally keen on the price. Their decision making process regarding the reasonableness of a price of a given product or service will depend on factors such as:
- The price being paid by competitors
- What may be thought of as a fair price by the market
- The period over which the price is agreed
- The quantities likely to be involved
- The level of risk attached to the purchase
Should one just focus on price?
In purchases price is obviously the most visible part of the purchase cost and most buyers tend to focus too much on it. Truth is you should not just focus on this aspect of cost alone for there are other costs worth thinking about and such will include:
- Training cost associated with what you just bought
- Test and support equipment costs
- Inventory and distribution costs
- Customers service costs
- Transport and handling costs
- Technical data costs
- Disposal costs
Remember in purchases the idea is often to think of how you can maximize the value for your money and that starts with knowing the difference between price and cost.