Cost, price, value

I find myself scribbling this diagram, and working through these ideas with people, frequently so I thought I’d write it up and share some brief notes here. I'm writing this as much for myself — to clarify my thoughts and have something to point people to — as to share.

This isn’t exhaustive, I just intend it to be a useful starting point for discussions, or for thinking about out what something should cost or whether something is worthwhile. I've also not even touched on competition or expectations. The pricing of competing services (or demands) obviously has a massive impact on what a buyer will expect and consider value for money.

As a final, but important, note: none of these, bar perhaps price, is purely financial. It’s often easier to think of and work with them as if they are, but that misses out on so much and so many possibilities.

Some quick definitions:

Cost

How much it costs to make or acquire something. This could be purely financial, but it often also includes time and opportunity costs (other things you could be doing, storing, thinking about, acquiring or selling instead).

Price

How much it is sold for. (Your price is someone else’s cost — or at least an element of it.)

Value

The ‘why’ — why someone buys it, what they get out of it. This is often less obvious than cost and price, may be entirely subjective and may be unknown or unclear to you (and possibly even to the buyer).

Margin

In simple terms this is the profit — how much you make on the sale.

Pricing errors

Priced too low.

It costs you more than you make by selling — you lose money.

Priced too high

It’s not valuable enough to the buyer to spend that much on.

To expensive to create or acquire

It’s not valuable enough even to make or create. It doesn’t matter how high or low you price it — it’ll likely never sell.

Pricing considerations

Small margin

You don’t make much out of each sale. This might be fine — especially if you sell a lot of whatever it is.

Large margin

You make a large profit on each sale.

The price — value gap

The buyer doesn’t really care about the cost, or the margin. They care about the value and that gap between the price they pay and that value.

The bigger that gap the more of a bargain it feels.

The biggest problem: Unknown value.

Symptoms of unknown value:

• Talking in terms of cost or margin.
• Negotiating cost, not price.
• Being unclear, up-front about how much something might be worth.

The ideal scenario

You and the buyer both feel like you got a great deal out of this. Your margin is good and the buyer feels they got real value for money.

I hope you find this as helpful or useful as I do. Please do feel free to ask questions or share thoughts.