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Cost vs Price

COST vs PRICE

As a definition, COST is the sum of factors that adds up to explain how much it really costs to make a certain product: material, transformation value added, overheads, and scrap. The PRICE is the COST plus the margin or profit. This profit is a factor of the type of industry, the location of the supplier, and mostly, a factor of the supplier’s perception of how strong are their competitors or even how close is the relationship with their customer.

Very often we see a variation of prices coming back as a response to a request for quotation, and some others we are limited to a very specific type of suppliers, and even sometimes, to a single supplier. This can be for various reasons: very specific technology, interest in that type of part, or simply because our customer tells us the supplier they want (this is called “directed buy”).

Cost engineers and good buyers will be able to determine what are the real manufacturing costs of the products they are buying, but suppliers are free to mark up as they wish. When there are many competitors, this margin is limited to “standard” values, whereas the supplier that know that they have little or no competition, they can take that advantage and mark up as they want. Cost engineers and trained buyers will challenge the supplier to reduce that gap between “should cost” and their price, and we have the tools to make that discussion very professional and with facts, but at the end, the outcome could very well be, take or leave it.

Nothing is black or white, there are many shades of grey, but I’ve tried to explain what’s the difference between cost and price. The higher the number of suppliers capable of making a certain product, the closer price and cost are.

Thanks

Leo Hernandez

Co-Founder of Society of Cost Engineers

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