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Determining the Differences Between Price + Cost

Price and Cost

March 20, 2024

You have probably experienced the following in one form or another — you go to purchase something and are shocked by the price. You decide that you need to purchase something for whatever reason, weighing the options, features or other determining factors, and then you take the necessary steps to buy it. When you do, you likely have some idea of what you think it is worth. If that price is greater than you expected, this generally leads to some amount of frustration or disillusionment. “That costs too much,” you have probably said to yourself. (Or to the person you are buying it from)

But let’s separate the idea of how much something costs with its price. The price represents the amount of money needed in the exchange. That’s it. It’s just the description of that amount. Cost means something different.

Cost represents the sacrifice you make in the exchange. It’s much more tangible than price – because it has the added dimension of loss, rather than the simple description of the quantity of something to be shifted around in the exchange.

Building a Strategy that Balances Price + Cost

When you are developing strategy, it’s important to consider things beyond price. I have worked with organizations that consider merging or acquiring other businesses — and they sometimes talk about “cost” in the same way that I described “price” above:

“How much will it cost (read: what’s the price?) of acquiring business ‘X’ to expand our reach?”

The flaw in the question is twofold. First, while the price of the business is important, it’s likely only a middling consideration, when factored against the larger “costs.” I acknowledge that it’s important to understand the price of things to determine if you can afford them. Absolutely. But once you know that, it’s just another piece of data (until you determine how the other elements of the transaction may add or impact the price you are willing to pay).

The second consideration is that the question itself is good — if you swap out the meanings of the words as I have indicated. That question drives toward making sure there is an understanding of what you may stand to gain or lose in the transaction from a value standpoint. This might be the value to you as a business, value to investors, value to consumers, value to the community, etc.

If you search for a service or product — or anything really — based on price alone, you are doing yourself a disservice. We have all made purchases based on trying to save money only to realize that option “costs” us more in the long run through repairs, constant replacement, lack of quality or lack of expected performance.

By building a strategy that balances price and cost, you will have a solution that contemplates the quantifiable number of something you will transfer in the process (or monetary resources you will no longer have access to) with the components that represent the value you will add that are not as easily quantifiable. It will also consider the costs or things you will no longer be able to utilize in the transfer (beyond money).

By separating “cost” and “price,” you are bringing considerations of these two essential components of strategy closer together to work in concert together in a way that will allow you to determine the right investment levels of both, to ensure long-term, sustainable and intentional growth.

The Greater Des Moines Partnership celebrates the Greater Des Moines (DSM) entrepreneur community and helps small businesses succeed with one-of-a-kind resources and opportunities for networking. Find out how other entrepreneurs have found success by reading their stories and attending local small business events in the region.

Joe Benesh

Joe Benesh is the President and CEO of The Ingenuity Company, located in Des Moines. The Ingenuity Company specializes in Strategic Planning, Diagramming, Organizational Design Thinking, and Leadership/Change Facilitation. He also teaches strategic planning at the University of Iowa in the MBA Program.