Cost, price and value: who is in control in business?

Cost, price and value are often used as if they are interchangeable words, but in reality there are fundamental differences between them and, crucially, in who can exert any element of control over them.

Value

We should perhaps start from the end in looking at value, since in many ways this is the most important and may be the most difficult to define and measure.

Value is what customers see in what we as suppliers have to offer them. It is their perceptions of what they see and understand rather than actually what is there or what we as suppliers think we are offering.

Thus individual perceptions are what convince a customer to buy or not. While we will try, through advertising and interacting (if we can) to try and shape their perceptions and expectations, we do not ultimately control them. Worst still, each of our customers might perceive things differently from all others.

So perceptions are what customers use to decide if they want to buy and ultimately if they consider that the price that is being asked is a fair match to their expectations of what they are prepared to pay.

Price

Price therefore comes down to the simple fact that it is what a customer is prepared to pay in a market place.

Of course in most market places there are alternative offers and other suppliers trying to affect the customers’ perceptions, so for any particular supplier there is little real control over what price will finally be accepted.

In the private sector, after the initial selection by the customer, there may be some negotiations about the price and service criteria, but this is not possible under EU procurement rules for those in the public sector.

So what is cost?

Cost is just the accumulation of the resources that we have used, but defined in terms of the common denominator of money. This cost will get us to the position of offering the good or service to potential customers at a price that we would like to sell, and which gives us an acceptable profit margin.

In many discussions about the transfer price between buyer and seller, the margin is the only thing that is in focus. However, if price is determined in the market and is therefore inherently less controllable, then the only place to really exert some useful effort is in the cost side.

This is where collaborative working makes real sense since the customer and the supplier can work together and take action together to reduce the total cost of doing business together, to their mutual benefit.

The distinctions drawn here between cost, price and value are not often clearly articulated and often behaviours do not change enough to recognise what can or cannot be influenced.

In specifying what customers want and in designing contract agreements it is worth spending some time to reach as close an understanding as you can about the customer’s perceptions and priorities in how they evaluate their choices.

If this is done well, the chances of a good result are much improved.