Saturday, September 21, 2013

Let's talk about Price, Value and Costs

19 September 2013

Price is a rather simple concept; it's the amount charged – money or other consideration -- for a good or service. Going beyond that term into the world of trade and finance seems to lead to ambiguity, misunderstanding and confusion for much of the populace. Other terms used in conjunction with price include cost, value, charge, worth and expense. Sellers often try to develop an emotional attachment to their products by appealed to greed through proclaiming their product to have a particular financial “value” – a subjective term. But first, a question that I have difficulty in answering: “What did that cost?”

The Oxford English Dictionary [A must have for anyone who wants to communicate effectively] defines costs as that which must be given, surrendered, in order to acquire, produce, accomplish or maintain something. A sacrifice. “Cost” is one of those terms like “compare” that has no assigned charge but may be positive or negative. That is, “compare” means to show both likeness and difference so it is neutral whereas “contrast” has assigned to it the negative -- to show differences. Cost can be associated with either the expense borne by the producer or the consumer. To first answer that question it would be necessary to be informed if the interrogator wants to know the producers' or consumers' “costs”. If I am the end user then it can safely be assumed that consumer cost is being sought. If I am the retailer then producer costs can be assumed. Calculating costs is then a matter of compiling data and assigning proportional values. This is simpler for the consumer as it consists primarily of price, taxes, plus resources expended such as travel and then the “opportunity costs” – the price of goods or services that could have been obtained through applying that time and capital towards another pursuit. Costs, therefore are not static but a variable dependent upon the productivity value of the individual. The costs of going to the grocery to get a pain reliever could be $50+ for the overworked attorney whereas it may be less than $3 for an out-of-work person with little or no ambition. Cost can also be applied to human situations such as letting the house work accumulate all week cost me the opportunity to go to the festival during the weekend. After considerable mental output the number given often shocks people.

Expense is defined as an outlay of time, resources, money, labour. Pecuniary charge, cost or sacrifice involved in the requisition of an object. Essentially it is the same as cost but is more narrowly applied to trade. Expense is also more aligned to a non-recoverable outlay. When considering a purchase we often weigh the expense against the value whether we realize it.

Value is defined as the amount of some commodity or medium of exchange that is considered to be a fair, adequate or equivalent return for a good or service provided. The relative status of a thing. The usefulness or importance of a thing or service and the comparable fair exchange of goods or services for exchange. Value also is subjective. The $50 cost for a bottle of pain reliever for the attorney who had to give up 15 minutes of work time to get it may be a bargain value. If that pain reliever allows him to complete two additional hours of billable work that day then the instant value to him is $400, minus his expenses. So value is always dependent upon time, place and user.

Charge is defined as a pecuniary burden, cost, The price required or demanded for the exchange of a good or service. Charge is the verb form of price.

Worth is a more interesting term in that it is both financial where it is nearly synonymous with value but also humanistic where it applies to a person's essence. It is defined as a pecuniary value. The esteem in which something is held. The amount of a resource or medium of exchange to be tendered in consideration of the transfer or a good or service. The value of a person or thing in terms other than a monetary exchange. In financial terms it differs from value in that the subjectivity of the user's benefit is removed. The value of the pain reliever may have been over $100 to the attorney at that time and place but it's “worth” was still market dependent. Worth more closely matches a consensus of the general population or rather “market price”. The so-desired-to-be benevolent are often heard in negotiation saying things like “It's worth $100 but you can have it for $20”. So nice to offer an 80% discount from what could be attained at that time and place from another party. Obviously that would make a good investment if the seller was being truthful.

Investment is defined as an outlay of capital into a business, commodity or other material for the purpose of seeking a profit. An investment can also be the monetary value of an outlay of human capital in time or effort. When making an investment there is an assumption or expectation that the original outlay of money, resources or some other medium of exchange will be returned in addition to a greater amount – profit. Technology is often seen as an investment, especially for businesses. What once may have required file cabinets filling a room the size of the footprint of your house can now be stored on the device that you are likely using to read this. Those files can also be searched with key terms of other fields rather than a clerk being paid to shuffle through file cabinets. The minimal outlay of funds for such a system is an investment with a substantial return.

To effectively manage your own finances and get the most productive use of your time it is imperative that you know and understand these terms. Invest some time in improving your financial acumen so that the value of your purchases exceeds their costs and provides a good return on investment. You'll find your life to be less stressful when you master that simple exercise.

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