Is there a Relationship between cost, price and value?

The most of the people think these three words are similar. When you take a look at the definitions you will see that’s not right.

Costs are the amount of money you have to spend to produce your product.

The Price is the money you gain from you customers when you sell your product to them.

Value the worth of your product in the customer’s eyes.

These definitions are quite abstract. For a better comprehension I want to tell an example.

The production of a mobile phone. The money you have to pay for the raw material, the employees, the transportation, and so on is the amount of your costs. In this example we assume that is 100€. But when you sell this phone to your customer you not only claim 100€. The customers pay more because the value is much higher for them. The mobile phone is a kind of a status symbol which not everyone owns. So you don’t sell it for 100€ you sell it for 400€. Here is the price 400€.

It’s neccessary that the price of a good is in a relation to the value it brings. Is the price of a good extreme high and gains no resonable value no one will buy it. You have to reduce the price.

Another problem is appearing when we speak about price and costs. In the paragraph above I said it’s neccessary to reduce the price when there is a bad relation between price and value. But you can only reduce your price lower than your costs. Otherwise you don’t get any benefit.

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One Response to “Is there a Relationship between cost, price and value?”

  1. johanneswoe Says:

    hey daniel!
    i agree on your opinion about the differentiation of cost, price and value!
    if you want to check out my blog concerning this topic just visit http://johanneswoe.wordpress.com/

    The last topic i’ve been writting about was just in time – feel freet o comment my blog

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