004: The Difference Between Price And Cost

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Hi! It's David Lee here.

I'm going to ask you a question, and it relates to business. What is the difference between price and cost?

Now I'm going to use this car, which is my son's car that he bought last year. He's 23 years old. He's a student. He's got part-time work. But for Adrian, what was the price? £6,000. Yes, we can go and pay the price once, or we have is an ongoing cost which is what we really have to include.

What's the cost for Adrian to run this car? Now just think, he's taken it out of the car yard. Immediately the depreciation must be 15%, 20% off this car straight away. That's a cost. What about the petrol? For him, a 23 year old, first car...insurance.

Can you think in business where you've got these ongoing costs? I'll give you a simple example. What about if you had a computer printer? Yes they're nice and cheap. A hundred pounds you'll get a printer, but what's the cost? Where does Hewlett-Packard, where does Epson make their money? They've got specific cartridges that you have to use otherwise, they say, you invalidate their guarantee. You are aware of that? That is where they make their money and that is where you incur the cost.

He's also got things like road tax and repairs. Now, when he's got a new car he may have less repairs, but typically I would have said to him, "Evaluate your situation, Adrian", and evaluate your situation in your business. Does he really need to incur the cost, the one-off price of paying £6,000 where he could have got a run-around for half the price. No, the depreciation would have been minimal.

It wouldn't be a target for thieves or for damage, all the other things that you have, because when we had young kids and, again I will go back to...it depends on your situation in business. When we had young kids they would damage the hell out of the car. Knocks and bumps, ice cream in the car, and when we go out and about I'm aware if I've got a brand-new car in Central London, for example, yes it could disappear by the time we get back. There are other things to consider.

So, one last thing I'd like to talk about is "opportunity cost". Now you go and spend a lot of money on one area of business and just like here, what was the opportunity cost? He could have done many other things. He could have taken the public transport, taken a taxi if he's got to take his girl out, or whatever, but we have to think.

Now, it's looking at business in the different stages you go through. When you are growing your business "infant stage" which is the startup. It's the growing or the "development stage". And finally the "maturity stage". So you really have to assess in which stage you are currently at.

So you're starting out in business maybe and quite likely you don't need the brand-new car, you just need something that's functional. Do you understand I'm using a metaphor? And so, we could get to the mature stage where your business is up and running. It's developed, and you can incur the cost of having the luxury car or the luxury whatever, the hotel that you who want to at stay because your business is in the stage of maturity.

So it all depends. Think about that in your business, the difference between price and cost. There is a difference, and then you add it all up, total it all up and then work out what's the best move forward in financial terms.

So, this is David Lee. Thanks very much for joining me. We'll see you again very soon. Bye! Bye!