Cost – Price – Value

Welcome back readers,

Today I am writing about three terms which rules the profitability of each business rather each transaction.

Cost – Facts / reality

It is the amount paid to acquire, produce or maintain anything, the point to note is “amount paid”, once the payment is done it becomes a fact. Even in complex scenarios like production the facts/costs can be ascertained, of course it may include setting up a complex process to accurately ascertain the exact and complete costs, but certainly it is possible. As most of you must be aware that costs have its own behavior, costs may be fully controllable, partially controllable or not controllable at all, some are apparent, some may not be visible easily and so on. When we refer to controllable costs, it is obvious it can be controlled before actually transacting. Once the transaction happens, it becomes fact/reality.

Price – Negotiation

It is the amount paid to acquire, produce or maintain anything. You would say, this is exactly the same as the definition of Cost mentioned above, its true, but still they are different. I will elaborate with an example later

Value – Perception

Value is a perception and can vary from person to person for the same thing or service. Rather than spending words on plain explanation, let us directly jump to an example.

Most of us buy bottled water for approx. Rs.20/- per litre. What is the cost of that water? The price we pay is Rs.20/-, what value we derive/perceive?

Let us assume that the exact cost of manufacture, transport, storage etc. is Rs.7/- per litre. Do you think making profit of about 200% on cost is fair? I am sure you would think 200% of profit on cost is unreasonable. The fact is you perceive value which is more that the price you pay i.e. Rs.20/- and thus, you are happy to buy the same. i.e. the bottled water industry is successful in projecting the value much higher that Rs.20/- and thus is easily able to sell at that price tag. If you are in a vicinity where there is enough clean drinking water, your perception of the value will change and there would hardly be any buyer for bottled water.

The same bottle with some cosmetic changes is sold at the multiplexes for price tag close to Rs.100/- per litre, thinking practically it seems unreasonably high, there would be few justifications for the same as well.

To put it in simple words – for any business it necessary to ascertain the exact cost of product/service, keep a price tag higher that cost (quite apparent) but the important part is to project value which is higher than price tag. In case of product the process seems to be easier than for services. The actual cost of service is quite low, the value is much higher thus, the price tag, but it is important to project the value appropriately to justify the price tag.

CA. Avinash Shukla

Email: caaashukla@gmail.com

Mo: 9890184190