RELATIONS BETWEEN PRICE; VALUE AND COSTS

SHORT DESCRIPTION OF THE TERMS

PRICE: The ability to charge for a product/ service dependent on supply and demand. One of several variables a customer considers in his or her purchasing decision. Furthermore the price is not only financial, it also contains e.g. the time a customer needs to learn to use a product.

COSTS: How much it costs you to produce a product or to execute a service. Costs can be divided into variable and fixed costs.

VALUE: Extent to which a good or service is perceived by its customer to meet his or her needs/wants. It is measured by customer’s readiness to pay for it. The dominant influencing factor is the customer’s perception of the product’s worth, and not the intrinsic value itself. Therefore perceived values can differ between customers. (Marketing view)

–> I’ve chosen a definition out of marketing as in my mind it fits the most to logistics.

POSSIBLE RELATIONS:

PRICE + COSTS:

A commoditized market is the only existing case in which price is determined by (variable) costs. The term commoditize is used when competing products are absolutely interchangeable (quality, design, function …) and thus customers make their purchasing decisions only based on prices. –> Price tends to converge towards costs!

Further connections can not been identified. It would be the thought of an ignorant to believe that prices drop when their costs would decrease, due to e.g. economies of scale. Of course companies then use their higher margins to increase their revenues.

PRICE + VALUE:

When you observe that customers are willing to pay higher prices (more demand) you know that their perceived value increased. Thus a company should react and increase their product’s price to the most efficient price in order to gain the highest profit. A higher price could also support customers cognition of the value (more expensive =better).

COSTS + VALUE:

I can not identify a general relation between the manufacturer’s costs and customer’s perceived values of a product. Of course we could say that higher costs are an effect of qualitative higher parts used for a product. But this argument gets invalid in the case that new production methods have been developed and used which allow a cheaper production.

Sources:

http://cdixon.org/category/economics/

http://www.businessdictionary.com/

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