Understand Cost

People confuse price with cost. Price is a simplifying assumption, and as such fails to fully describe cost.

Cost is the opposite of value or benefit. Like in Cost-Benefit analysis. If you don’t fully understand cost, cost-benefit will be a failing exercise.

Understanding value

Suppose I buy a new audio headset. What do I value?

Comfort, bluetooth rather than corded, long battery life, quick recharge, audio response, convenient controls, warranty, and way down the list – fashion. Your values and their weighting are likely different.

Cost is equally easy to understand.

Price is what I have to pay in money to get the things I want, but that is only the beginning. What about convenience? Ease of access to buy? Free parking? Convenient hours? In stock? Knowledgeable staff? Can I return it if it turns out to be unsuitable? Does the vendor take credit and debit cards?

As it turns out price is the equalizing variable.

If I get get the comfort and a good battery, but not so much convenience and durability, I will adjust the price I would pay to be suitable to me. If I don’t get comfort, it likely can’t be cheap enough. If there is too much fashion, I would likely want to pay less.

Price is part of cost but not all of it. By that reasoning, low price is not a value.

People overrate price

Think Price – Cost – Value and then reflect a little.

John Ruskin had it figured out 150 years ago,

  • “A thing is worth what it can do for you, not what you choose to pay for it.”
  • “It’s unwise to pay too much, but it’s also unwise to pay too little. When you pay too much, you lose a little money ….. that is all. When you pay too little, you sometimes lose everything because the thing you bought was incapable of doing the thing it was bought to do. The Common Law of Business balance prohibits paying a little and getting a lot … it can’t be done. If you deal with the lowest bidder, it is well to add something for the risk you run, and if you do that, you will have enough to pay for something better.”

Be sure you get the values you want and understand what you must give up to get them. Only then can you reasonably consider how much money will balance the deal.

Recall Moe Margles’ Law – “Cheap is expensive.”

I help business owners, and professionals understand and manage risk and other financial issues. To help them achieve their goals, I use tax efficiencies and design advantages to acquire more efficient income and larger, more liquid estates.

Please be in touch if I can help you. don@moneyfyi.com 705-927-4770

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