Cost versus Price: Understanding the Difference in Business

Welcome to Wisdom Wednesday.

In today’s newsletter, I want to focus on two important business terms: cost and price. While these words might seem interchangeable in everyday conversation, they hold distinct meanings in the world of business. Let's delve deeper and understand how to use them effectively.

Cost vs. Price: The Difference between General Use & Business English

Think about a recent shopping experience. Did you ask:

"How much does this shirt cost?" or

"What's the price of this shirt?"

Both of these phrases worked perfectly well. However, the dictionary reveals a subtle difference:

• Cost - noun - the amount of money needed to buy, do, or make something.

• Price - noun - the amount of money for which something is sold.

While cost and price are the same in this example, the terms are used differently in Business English.

Cost and Price in Business

Imagine yourself as a product manager. You will want to know the answer to two key questions:

1. How much does it cost to manufacture this product (e.g. a shirt)?

2. What price can we sell this product for?

The cost represents the expenses incurred in making the shirt, including raw materials, labour, and overheads.

The price represents the selling amount that the shirt can be sold for. This may be a retail price (direct to the customer) or a trade price (to a retail business such as a shop or online store).

The Price Formula

A simple equation helps us understand the relationship between cost and price:

Cost + Profit = Price

It is important to note that a product's price isn't solely determined by its production cost. Consider luxury brands like Rolex. Their watches have high production costs, but the brand name and prestige also contribute to a significantly higher selling price. This "premium" reflects the value customers perceive in the brand and scarcity (limited supply).

Beyond Manufacturing Costs: Other Factors Influencing Price

Several factors influence a product's price besides manufacturing costs. Here are a few examples:

• Market Demand: If customers are highly interested in a product, companies can command a higher price.

• Competition: If similar products exist in the market, companies may need to adjust their price to remain competitive.

• Distribution Costs: Getting the product from the factory to the consumer adds costs that affect the final price.

• Scarcity: Some products are deliberately manufactured in small quantities to limit supply and increase desirability.

DCA Example: Cost versus Price

In a previous newsletter, we discussed dollar cost averaging as an investment technique. In this case, the cost is the amount you invest each time, while the price of the asset itself can fluctuate depending on the market.

Mastering Cost and Price for Business Success

Understanding the difference between cost and price is crucial for business success. By carefully managing costs and strategically setting prices, companies can achieve profitability and cater to their target market effectively.

Remember:

• Cost reflects the resources used to make or acquire something.

• Price reflects the value a customer is willing to pay for it.

By mastering these terms, you'll be well-equipped to navigate the world of business communication!

Word of the Day - Overheads

Overheads - noun - the indirect costs involved in running a business such as rent, rates, electricity etc.

Direct costs are the amount paid for stock.

As a general rule, overheads do not vary with turnover (the amount of stock sold).

Overheads (plural) is common in British English whereas you will often hear ‘overhead’ (singular) in American English.

Do you have any Business English questions?

Please email me and I will do my best to answer them in future newsletters.

Until Friday - have a great day!

Iain.

www.communicateenglish.com

p.s. Do you know anyone who might like to join this mailing list? Please forward them this newsletter and they can join here: