Product Pricing: Price your product or service

The difference between cost and value

Knowing the difference between cost and value can increase profitability.
The key differences

• The cost of your product or service is the amount you spend to produce it.
• The price is your financial reward for providing the product or service.
• The value is what your customer believes the product or service is worth to them.

For example, the cost for a plumber to fix a burst pipe at a customer's home may be £5 for travel, materials costing £2.50 and an hour's labour at £10. But the value of the service to the customer - who may have water leaking all over their house - is far greater than the £17.50 cost. So the plumber may charge £50, for instance.

Your pricing should be in line with the value of the benefits that your business provides for its customers, while also bearing in mind the prices your competition charges.

To maximise your profitability, find out:

• What benefits your customer gains from using your business
• the criteria your customers use for buying decisions - for example, speed of delivery, convenience or reliability
• what value your customers place on receiving the benefits you provide

Wherever possible, set prices that reflect the value you provide - not just the cost.