Cost vs. Price
Cost is the expense that a business invests in bringing a product or service to market. Price is the amount a customer pays for that product or service. The difference between the price that is paid and the cost that is invested is the profit the business makes when the item sells. As an example, if a customer pays DKK 100 for a product that costs the company DKK 50 to produce and sell, the company makes a DKK 50 profit.
When calculating the cost of a project or product, a business must add the cost of everything necessary to produce it. If a business runs a retail store, the cost of the item would include a portion of the building's operating expenses and the sales associate's salary. In the case of a building project, the cost of engineering, procurement, construction, installation, labor, transportation etc. needs to be included in the calculation.
Business owners (and thus project managers) must factor in their cost when setting a price, but the customer ultimately determines the price. Products that are priced too high may remain unsold until the price drops to a point that matches the customer's perceived value, which is what customers believe the item is worth, given their current cost of living. In a bid or tender for a building project, the cost must neither be too high or too low; if too high, the another contestant wins the project; if too low, the quality of the project proposal is questioned.
But what is the best price for a product or project? Here are the 5 critical C’s of pricing:
- Cost (the expenses invested in the product or project)
- Customers (what are they willing to pay?)
- Channels of distribution (consider the advantages and disadvantages of selling through a “middle-man”)
- Competition (there are most likely many companies trying to sell the same product as you! How can you make the customers choose your product instead of theirs?)
- Compatibility (Make sure your pricing approach is compatible with your marketing objectives)