In this whiteboard session, Chris Do breaks down what you need to know to run a profitable business and make money. He distinguishes the key differences between cost, price, and value, and how each determine the profitability of your business.
Let’s break down the difference between cost, price, and value, and how you can make more money knowing this.
Cost
Cost, by definition, means the amount of money spent by the company in the manufacturing of a product or creation of a service. It’s usually measured in time (effort) and materials.
The cost of something is the amount incurred on the inputs for producing any type of product. When a client asks, “how much does it cost to make this,” they actually want to know the price attached.
Price
Price is determined by cost plus the profit. It’s typically determined by the seller and the amount of risk they are willing to take on to sell their product or service.
Let’s say it costs $2.50 to make a bottle of shampoo. You sell it to a retailer for $5.00 to make a 50% profit ($2.50). Once it hits retail shelves, the price of that shampoo for the consumer (us) comes to $10. The manufacturer of the shampoo, then, earns a substantial profit. Their product only costs $2.50 to make, but by selling it for $10, the price is justified by the profit earned.
Value
Value is subjective and entirely determined by the buyer. As Warren Buffet puts it, “price is what you pay. Value is what you get.”