Price Vs Cost – How Do These Two Differ?
Running a business takes a lot of thought, planning, and learning. But there are two major questions every business owner should have figured out – What is the cost of running the business? and What price is the business charging its clients to recuperate the cost of running it?
People often use “Price” and “Cost” interchangeably, but these two words actually mean very different things in regards to financial statements and accounting. As a business owner who wants to succeed, it is vital you understand the various ways these two words are different and what significance they hold for your business.
Price vs. Cost
The first difference between Price and Cost lies in how they are defined. By definition, Price is the amount of money a consumer or customer is willing to pay in order to obtain a product or service.
Cost, on the other hand, is the amount a company or business pays to produce a product or service before it is put up for sale. It is the expense incurred by a business in the process of producing its products and services. In addition to production, the distribution and marketing of products and services are also included in the Cost.
Below is a highlight of some of the key differences between Price and Cost.
|Price is the amount of money a customer is disposed to pay in order to obtain a product or service.||Cost is the expense a business incurs for creating or making a product or service before it is sold to customers.|
|The demand for Price is placed on customers or clients.||The demand for Cost is placed on sellers or producers.|
|Price creates an influx of money.||The effect of Cost is an outflow of money.|
|The Price of a product or service depends on several factors: The client or customer’s buying power Market competition Audience of the target market Client or customer’s bargaining power. The number of sellers and buyers of the product in the market.||The Cost of a product or service depends on several factors: Demand and supply of product or service Kind of raw material(s) needed to produce the product Company’s (producer’s) bargaining power Number of sellers present in the market who deals in that product.|
|Businesses and companies aim to increase prices.||Businesses and companies aim to decrease costs.|
|In most cases, a company can control the price at which they sell their products.||The cost of making and maintaining products is outside can be impacted but factors outside the company’s scope. (suppliers cost, taxes, fees etc.)|
|Price is set based on the Costs incurred by the company or business.||Cost and expenses ultimately determine a companies margins.|
It is important to note that while price and Cost are different, they are interrelated. This is because the cost of production in a business will directly impact the price at which goods and services are sold. So, the more money goes into producing a product, the more a customer will pay to acquire that product.
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The Bottom Line
In our everyday use of English, these two words are used interchangeably but when it relates to business, they are very different (though related) terms. It is important to understand pricing and cost because they are keys to ascertaining the profit margin of your business.