Thursday, May 6, 2010

Price vs Cost

I read somewhere that Americans know the price of everything and the cost of nothing. A sad statement of consumerism and the lack of knowledge what value thresholds are related to the product.

"The price of anything is the amount of life you exchange for it" Henry David Thoreau.

In business the goal is to capture the greatest price regardless of the product cost (e.g. Gross Margin). Selling value is the mantra. Cost is measured too simply as current expense and does not capture all the intangibles (e.g. the amount of life exchanged to bring the product to market). Too often historical costs are forgotten (example would be R&D costs/ lifetime view of a product). But those costs are only value to the person who has exchanged their life - not the consumer.

Using price alone to measure value is a dangerous conclusion since prices are also a function of demand (i.e demand becomes a form of expected value). So I can logically establish the price based on product cost but the demand (the ultimate measure of consumer value) will trump all pricing logic.

The tension of price vs cost mirrors the challenges of choosing what life you are exchanging.

No comments:

Post a Comment