Captain’s log, stardate 20191106

What’s the difference between cost, price, and value?

Sent by Jonathan Stark on November 6th, 2019

A classic question came up in TPS today that I haven’t talked about here on the list in quite a while.

Since there are a lot of new folks who might have missed it in the past, I want to quickly define the differences between the terms cost, price, and value.

Cost—The least amount of money would you sell your product or service for (i.e., your “walkaway” amount)
Price—The amount of money that changes hands between buyer and seller (NOTE: In most cases, price is presented upfront. But in an hourly billing model, the price is not known until the project is over. This is a major problem with the hourly approach.)
Value—The maximum amount of money your client would pay for your product or service (i.e., your client’s “walkaway” amount)

The genius of value pricing is that it starts with defining the value, then price second, and finally the cost (i.e., your scope).

Why is this genius?

Because when you encounter high value engagements - “expensive problems” in my lingo - you can set prices that are potentially very high compared to your costs. This leads to very profitable engagements for you.

Yours,

—J