In a commercial transaction, a product or service is exchanged for a price, between the buyer and seller. So, we can say that price is the amount to be paid, in order to get the product or service. There are many people who believe that price, cost and value of a product or service are one and the same thing, but there is nothing like that.
Cost is basically the aggregate monetary value of the inputs used in the production of the goods or delivery of services. Conversely, Value of a product or service is the utility or worth of the product or service for an individual.
In a marketplace, you can find a range of products, offered for sale by different marketers, which differ in their size, shape, quality, performance, type, etc. You might have noticed that at the time of shopping, the first thing that we usually check in a product or service is – what is its price? And we also try to estimate – how much does it cost? But before taking the buying decision, all that matters for a person is – what is its value?
In this piece of writing, you will get to know the differences between price, cost and value.
Content: Price Vs Cost Vs Value
Definition of Price
Price is the consideration given in return for acquiring a good or service. In a commercial transaction, price refers to the amount charged by the seller from the buyer, in exchange for any product or service, which includes cost and profit. It is the return for quality, often expressed by the value, at the marketplace.
It must be noted that it is referred by different names when used in different contexts, i.e. when the subject matter of the commercial transaction is a good it is called as ‘price’, but when the subject matter is a ‘service’, it can be known as:
- Fees: For the supply of professional services.
- Premium: In the case of insurance.
- Rent: For the use of place or machinery.
- Fare: In the case of transportation.
- Salary: For the work done in an organization.
The price element differs from the other three elements in the sense that it is the price which generates revenue, while the other three adds to the cost of production.
Definition of Cost
The cost can be defined as the total amount spent on the inputs like land, labour, capital, machinery, material, etc. with an aim of producing the product or supplying the services. It can be anything which adds to the expense of product or service manufactured or supplied by the firm.
In simple terms, cost implies the financial worth of the sacrifice made, to obtain the goods or services. It is incurred for present or future benefits. The basic elements of cost are: Material, Labour and Overheads.
At the time of setting up a price, it is necessary to identify and compute all the costs, as they affect the business profitability to a great extent. Further, costs are divided into fixed costs and variable costs:
- Fixed Cost: Costs, which remain the same irrespective of the number of units produced, it is called a fixed cost. For Example, Rent, depreciation, insurance, web hosting etc.,
- Variable Cost: The kind of costs, which varies with the number of units produced is called variable cost. For Example Raw material, labour, shipping cost, etc.
Definition of Value
The value is decided by the marketplace on the basis of the benefits received from the combination of features, or specifications, present in a particular product. The combination of features covers material or functional characteristics, product reliability, user-friendliness, appearance, customer support and technical assistance, etc.
Characteristics of Value
- Immeasurable in nature, because the value of the product is different for different persons.
- For example: For a person suffering from hypermetropia, spectacles are invaluable, but if a person’s eyesight is absolutely fine, the value of spectacles for him would be zero. So, with this example, we can conclude that value is dependent on the need and usefulness to the person, at a certain point in time.
- Value varies from time to time.
- For example: The value of a book for a student before the exams is greater in comparison to the value of the same book, after clearing the exam.
- Value of a product or service greatly depends on the supply of the product and the demand among the buyers.
- For example: Suppose there is a shop for sale in a market area. It has hundred’s of buyers, which clearly describes its demand. As the supply is less, and demand is more, the value would be high.
- Differs from one place to another.
- For example: The value of woollen clothes will be higher in cold areas, as compared to a desert area.
Key Differences Between Price, Cost and Value
To have a deeper understanding of the difference between price, cost and value, let’s take a look at the points stated below:
- The price implies the financial compensation for the supply or use of the product or service. Cost refers to the amount of expenditure made on a particular product to produce it or to undertake any activity. On the contrary, Value implies the usefulness and desirability of a product or service to a customer.
- Price is what the company charges for goods or services from its customers; Cost is the what the company pays to acquires goods and services for production, whereas and Value is what goods or services pay to the customers i.e. worth.
- While the price of the product is determined by the customer’s or marketer’s viewpoint, the cost is ascertained from the producer’s viewpoint. But, the value can be determined from the consumer’s viewpoint, because, he/she is the ultimate user of the product or service, who is going to use the product in real.
- When it comes to monetary measurement, both price and cost can be monetarily measured. However, the value cannot be measured in terms of money.
- Price is estimated through the pricing policy and strategy of the company. Unlike, Cost is assessed on the basis of actual expenditure incurred on manufacturing a particular product, but the estimation of value is based on a customer’s opinion about the product or service.
- Market fluctuations causing due to demand and supply forces or competitive forces or the prices of related items often affect the price of the product. Similarly, there are a number of factors which leads to the rise and fall in the elements of cost, i.e. material, labour and overheads, which may include a change in economic condition, government interference, technological changes, and so on. However, the value of a product or service for a consumer is not affected by market fluctuations.
Example 1: Price Vs Cost Vs Value
Suppose a person goes to a shop to buy medicine, for which he pays Rs. 1000, so it is the price. Further, the amount the seller, or the manufacturer spent on producing the medicine, is its cost, which may include the cost of labour, material, transportation, research and development, office expenses etc. The cost is usually less in comparison to the price on which it is sold.
Now, the medicine bought by the buyer is of utmost importance to him, as it is going to treat his loved ones. This usefulness is of the medicine at that point of time is nothing but ‘value’.
Example 2 (a): Price Vs Cost
If you purchase a brand new car, then the amount you pay to the car seller for its acquisition is its Price while the amount invested in manufacturing the car is its Cost. Normally, the price of any goods or services is more than its cost because the price includes the profit.
Example 2 (b): Cost Vs Value If you are a watch manufacturer and produce millions of watch on a daily basis, then the cost of production is your prior concern and not the value of the product. You may try to achieve the economies of scale i.e. mass production at less cost. Whereas from the customer’s perspective, the purpose for which the watch is purchased must be fulfilled, which determines its value.
Example 2 (c): Value Vs Price
This can be explained easily with the popular example given by Prof. Adam Smith about water and diamond. Water is much important for us to survive still it is of low price, while the diamond is just used for ornamentation and nobody dies if he/she does not get it, still it is priced very high.
The reason behind this is its value, as the value of water is much for us, it is available in abundance, that is why anyone can get it at a low price, while the value of a diamond is less for us, but still, it is a status symbol. Therefore, it is priced very high.
So, we have understood that to increase the market share or to create a competitive edge, the firm can either increase the perceived benefits, i.e. value derived from the product or reduce the perceived cost. Therefore, both will affect the price.
From the customer’s viewpoint, they have set criteria, as to what extent they can or they are willing to spend on a particular product, to satisfy their needs. Obviously, they would like to pay the least.