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, 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 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 is subjective and entirely determined by the buyer. As Warren Buffet puts it, “price is what you pay. Value is what you get.”
When the value of what you’re offering exceeds the price, people will buy. People are often more motivated to buy something when they have a deeper attachment to it. When their emotions are invested, they’re more likely to buy.
Consumers are always seeking to elevate their level of status in some way, and if they feel that your product or service brings the kind of value they’re seeking, they will keep coming back.
Why does the price of a coca-cola vary between wholesaler, retailer, and the movie theater concession stand?
A can of Coca-Cola from a wholesaler, like Costco, costs about $0.29 per serving. While that’s an incredibly low price, it comes at a cost. Going to the store requires planning, time, and effort.
If you were to grab a can of Coca-Cola from a retailer, like a vending machine, the price comes to $1.75 per serving. The drink is pre-chilled, ready to drink, and conveniently located. In the customer’s eyes, it’s reasonably priced.
Now, let’s take it to the movie theater, where a serving of Coca-Cola costs $4.50. Looking at the prices of Coca-Cola elsewhere, this seems pretty outrageous. But there are several driving factors here: the movie theater makes most of its revenue from the concession stand, and has exclusive monopoly over the soda.
Not only that, but there’s a certain amount of value attached to buying a soda and bucket of popcorn at the movie theater. Maybe it brings you back to your childhood, or your first date. We’re all conditioned to take part int he movie-going “ceremony” and experience.
There’s an emotional response to sharing a moment that makes spending $4.50 on a Coca-Cola seem worth it and of value to us.
The concepts presented in this video are just a small snippet from our masterclass, Business Bootcamp. If you’re interested in leveling up your business to double, triple, or even quadruple your revenue, while getting coached by industry pros, check out Business Bootcamp.
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