Guide

Price your product or service

The difference between cost and value

Knowing the difference between cost and value can increase profitability:

  • 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. However, the value of the service to the customer is far greater than the £17.50 cost. The service may have prevented damage caused by a leak. The plumber may decide to base his price on value, rather than cost, and charge a total of £50.

Assess the value of your offering

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 competitors charge.

To maximise your profitability, find out:

  • what benefits your customers gain from using your product or service
  • 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.