Monday, April 30, 2012

Money Matters 101: Price versus Cost

I just got home from a nice haircut, and one thing I noticed was the news being showed on TV. There was this debate on how much the minimum wage be increased. Employees are asking for a higher price than what the employers can give. Due to the increasing cost of living, people are demanding for higher wages, and it usually falls to deaf ears.
Having said that, this segment of Money Matters 101 is very important for us consumers, as we always want the best value for our hard-earned money. Today we are discussing the difference between price and cost.

By definition:

Price n. the amount of money expected, required, or given in payment for something: land could be sold for a high price | a wide selection of tools varying in price.

Cost n. an amount that has to be paid or spent to buy or obtain something: we are able to cover the cost of the event | health care costs | the tunnel has been built at no cost to the state.

I do not know about you but I find the definitions a bit confusing.

Here's the simpler explanation of the relationship between price and cost...using an example.

At times we tend to procrastinate, and there's a part of it that is normal, and that is for the reason of wanting to have the best value for our money. Procrastination is higher for more expensive items.

Take for example, two cellular phones with exactly the same specifications, but let us label the brand known for its good quality but a bit on the higher price tag as brand A, and the cheaper brand as brand B. Brand A sells for 8,000, while Brand B for 4,500. Our first consideration is to buy the cheaper one (hey, they are identical, we thought). After six months, Brand B's screen got busted, so you pay 500 for an LCD repair. Six months later, its casing broke, so you need to buy a new casing for 500. Again, six months later your backlight broke down as well, so you shell out another 500 for repairs. And after six months yet again, battery life became short so you bought a new battery pack for 1,000. After roughly 2 years of headache, you then decided to dump the cheap one and get Brand A. Now let's say Brand A lasted for 5 years.

Here is the whole story, in a simplified form (pardon the handwriting tho).

(Currencies are in Philippine Peso, but it does not take rocket science to figure out the message, right?)

By opting to purchase a cheaper item, in the long run this diagram shows you the difference between price and cost.

[Read also: Money Matters 101: Savings for the Savvy Saver]

Take example number 2, a guitar. Again, Brand A is the pricey one and B the cheaper one. Almost the same explanation as above. Check it out.

Here in this example, guitar B's price was lower than A's (5,000 against 15,000), but their cost difference was glaring (1,700/yr vs. 2,700/yr).

The thing I'm pointing out here is this: Price is a one-time thing (amount given in payment for something). Cost is something you are going to deal with as long as you have the product.

So, the next time you are going to buy something, consider this article and ask yourself: am I buying for the PRICE, or the COST?

One final thing I'd like to share to you is this:
If you buy cheap, you get cheap. If you're willing to spend a bit more for quality then you are getting your money's worth. Remember, in any commodity, you'll always get what you've paid for.

Until the next segment!

Reference: Secrets of Closing the Sale (Zig Ziglar) - one of the best books I've ever read

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