Price and cost
9 Apr
In the simplest form, we can describe both price and cost with this equation.
Price = Cost + Profit
However, this equation isn’t exactly accurate. It shows that the price is somehow correlated to the cost, which isn’t true in some cases. Regardless whether you watching Avatar with a 200+ million budget or The Blair Witch Project filmed with just 22,000, you are going to be paying the same ticket price at the cinema. Here, the price is uncorrelated to the cost.
Price is actually a function of supply and demand. But, cost will in one way or another determine the lower bound for the price. If you want to know more about the relationship between price and cost, check out this post from Chris Dixon.
Lower cost doesn’t mean lower price. It’s all about profit, I think XD
Unless you’re doing charity, that’s a different story kekekeke
You forgot to touch on the other part of the equation, which is PROFIT.
How much exactly is PROFIT? This magical number is determined by individuals themselves and varies amongst individuals. I would believe PROFIT is PARTIAL MUTUALLY EXCLUSIVE and as sometimes it is affected by other’s concept of PROFIT.
That’s right mas! If boss A has fixed his Price at $ X for his product and saw boss B give away the same product for FREE/CHARITY, boss A might change his Price to rival that of boss B’s Price.
@nick, @massy: You guys are missing the point. What I’m saying is the price isn’t determined by the cost. I’m leaving out profit because I’m not talking about it. And yes obviously it’s all related to profit because that how business sustain itself.
Also, if someone is giving out something for free. It’s not saying their cost is 0. It’s just that they are earning from other revenue streams. Which is exactly my point. The price and cost isn’t always correlated.
Put it in another way… nothing is free… Profit has to come in one way or another. Doesn’t really matter in what form….
@Lim oic. I was more concerned with the Profit part hehe. Then may I suggest that you change the title to Price =/= Cost.
Put it this way, that simple equation works well when you want to sell an item. In other cases, like when selling services, you don’t really quantify a cost, but instead you follow the industry standard on pricing of the service.
In Lim’s example, price of a movie ticket has little to almost nothing to do with how much it cost to make the movie. Instead, the price is calculated based on cost of running the theater to show the movie to you. The price goes up the longer the movie is as it cost more when a long movie causes a theater to be able to screen less movies for a day.
I work in a service line and sell my “service” or “time”, while i might actually have a cost i make up a profit.
Interesting post.