February 26, 2025

Cost doesn’t determine price

Years ago, I read a line in one of Ron Baker’s books (I think it was Implementing Value Pricing) that stopped me in my tracks:

“Cost doesn’t determine price. Price determines cost.”

(Paraphrasing from memory, but that’s the gist of it)

I must’ve re-read it five times, thinking, “Wait, this must be a typo, right? Surely, he meant to say that the other way around.”

But I kept reading, and the lightbulb eventually came on 🤯

It’s a total game-changer once you understand this.

Sure, you want your price to be higher than your costs, or you’ll lose money, but that’s the only relationship between the two numbers.

So, if you can’t use your costs to determine how high to set your price, what do you use?

The perceived value in the mind of the buyer.

Once you have a rough idea of what something is worth to a buyer, you can set a price that is a fraction of it.

Now, here’s the real mind-blower:

Once you have set a price, you can set your costs based on it!

I’ll illustrate with some rough numbers:

If something is worth $10,000 to the client, you can price it at $1,000, and they will almost surely buy it.

The trick (and the fun part!) is to design your solution in a way that only costs you $100 to deliver.

With these numbers, both parties (buyer and seller) get a 10x return on their investment.

Win-win!

Yours,

—J