Let’s take a look at the very brief definitions of costs, price and value.
These three business terms are very important for any business organization. And, knowledgeable business managers should familiarize themselves with differences between business costs, product prices and added value.
Costs
Costs are all of the spending that a business organization must incur in order to make the product – manufacture goods and provide services.
Business costs are mainly determined by suppliers of raw materials, company’s market power to get the best possible deals and negotiation skills of managers.
After costs are deducted from sales revenue, the business earns profit.
Price
Price is the amount of money that a final customer needs to pay in order to buy the product.
Prices are determined by the laws of supply and demand, market momentum, customers’ mood and the amount of speculation.
Prices are often negotiated, and businesses will use different pricing strategies to set the final price.
Value
Value means all the benefits that a business brings for its stakeholders. Specifically, all the sales revenue, profit and cash that a business generates for the owners. Value is determined by future cash flows, business growth and risk. Any business that brings more cash at lower risk will be more valuable than the risky business that brings very little cash.
Also, value is all the benefits that a person gets from owning and using the product. For example, by owning faster cars, people can arrive at their destinations sooner. So, the time saved on traveling between Point A and Point B is the benefit here which is value.
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Do you want to know how businesses add value for customers?
How to Add Value to Keep Your Customers Satisfied?
Do you want to know how companies maximize shareholder value?
Examples of Business Objectives in The Private Sector: Maximizing Shareholder Value
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All in all, we can say that businesses incur costs, customers pay the price and shareholders and customers gain value.
