What is the Difference Between Cost, Price, and Value?

This article will discuss the difference between the three and demonstrate how cost and price affect the business value.

What Are Cost, Price and Value?

Cost: The cost represents the amount of money a company must pay to produce a product or service. For example, in a furniture manufacturing company, the cost of furniture includes the cost of human resources - the cost of workers and raw materials, such as wood required for furniture production.

Price: The price at which a product or service is sold to a customer - i.e., the amount a customer is required to pay to purchase a product or service. Any price includes two primary elements - the cost of the product to the company and the second - the profit that the company seeks to earn from the sale of the product or service.

Value: Value means - how much is something is worth. When we talk about the value of a company - we mean the value of the company. If someone wants to buy the company - what amount will he be willing to pay for all the company shares?

All company valuation models ultimately examine a company's profit, and all agree with the fundamental assertion that the higher a company's profit, the higher the company's value will be. A company that makes a million dollars every year is worth more than a company that makes half a million dollars a year.

Now that we have made clear the three concepts - cost, price, and value - we can answer two questions - what is the relationship between the cost of the product and the value of the company, and what is the relationship between the selling price of the product and the value of the company?

what is the relationship between the cost of the product and the value of the company?

The first question is - what is the relationship between the cost of a product and the value of a company? The answer to the first question - is negative relation.

Given the other fixed factors - the higher the product cost, the lower the company's profit, and therefore the company's value will decrease.

For example - given two companies that produce the same product, and sell it for 100 dollars per consumer, can have a different level of profitability and consequently have a different value. If one company produces the product at the cost of 10 dollars while the other at the cost of 20 dollars - the first company will earn 90 dollars, during the second - only 80 US dollars.

what is the relationship between the selling price of the product and the value of the company?

The second question is - what is the relationship between the selling price of the product and the value of the company? The answer to the second question - is a positive relation.

Given the other fixed factors - the higher the price of the product, the higher the company's profit, and therefore the company's value will increase.

For example - two companies that produce the same product at the exact cost - of 10 US dollars can have a different value due to the other selling price. If the first company sells the product at a price of NIS 100 per consumer, while the second company for 110 dollars, then the first company earns 90 dollars, while the second - 100 dollars. The conclusion is that the second company will have a higher profit and consequently a higher value.

Conclusion

In this blog post, we have discussed three concepts - cost, and price, and value. If you are interested in valuing a company, please do so for free using our business valuation software Equitest. For a free business valuation - click here.