Price vs. Cost: The Unreliable Truth of Confused Definitions

Price. How important is it to you? How often do you try to get the lowest price?

I’m sure you’re thinking to yourself, “It’s incredibly important.” and “Every chance I get.”

And that’s fair.

It’s also common to ask how much something costs. Or to reduce the cost of something.

We often use price and cost interchangeably. That’s a mistake.

Skylink, price, cost

Skylink, price, cost

Confusing the two costs you time and money. And if you’re trying to save money, that’s counterproductive.

As the age old saying goes, Beware the cost of the lowest price."

And that holds true today.

Price and cost are different. They both have vastly different meanings. And they both can dramatically affect how your operation functions.

Let’s dive into both.

The definition of price and how it affects you

Webster dictionary defines price as “…the amount of money given or set as consideration for the sale of a specified thing.”

This is what you pay when you purchase an aircraft part. You pay $100 for a titanium bolt. $10,000 for a TCAS processor. $150,000 for an APU.

You get it.

The price is the amount of money you pay for something.

Price is important. It’s the start, but not the finish.

Price is a start. 

Price is a start. 

Paying 30% over fair market value for something is crazy. If we’re just looking at the “price.”

But, if paying 30% more for a product or solution that reduces your costs by 40%-- That makes sense.

Just because the material is less expensive than other options doesn’t mean you’ll save more money in the long run.

Sometimes you end up spending more in part because of time and efficiency lost to a mediocre product or service.

Or, you could potentially spend twice as much as you’d originally hoped because you have to buy a replacement for that first purchase. Not fun!

Price is important, but it’s not everything.

How to use price effectively

You want to use price as a benchmark. You don’t want to solely make your decision on price.

Let’s say you have Trusted Material Adviser A who proposes an APU solution. The price of the solution is $250,000. You also have Vendor B. Their price is $225,000.

Partner A is trustworthy.

The deliver on time. They’re easy to get ahold of. They rarely give you any problems.

They also proposed in their initial price logistics, maintenance, and support. This will save your operation $30,000 from having to source, process, and chase various aspects that these additional solutions cover.

Vendor B is okay.

They follow-up often and are very concerned with the sale. You can’t reach them on the weekends though. And not everything goes according to plan. They’re good. Not great.

In their proposal, they quoted you just the APU. That’s all they want. Money!

If you’re just looking at price. Vendor B is the choice. However, if you look deeper, Partner A makes you more efficient, saves you time, and has a better overall cost.

Use price as a gauge. Don’t rely on it 100%. Use other metrics and factors to make your decision.

Cost is a very good metric.

Why cost is more important than price

Webster dictionary defines cost as “…the outlay or expenditure (as of effort or sacrifice) made to achieve an object.”

Meaning, not just the price of the material, but how that material affects your operation over the course of its useful life. Or, foreseeable future.

Cost is what affects your operation. It's what makes or breaks your operating expense.

Material A’s price is $90,000, but it costs you $170,000 due to failure, inefficient delivery, holding costs, freight, etc.

Material B’s price is $100,000, but it only costs your operation $125,000 as your partner is more efficient, they cover logistics, there's little issues, and they maintain proper deliverables.

Cost is where you want to play.

And it's hard. You have to procure so many items every week. You can’t evaluate “cost” on everything.

So what's the catch?

Focus your efforts on efficiency and reduced cost will surely follow.

We've written exhaustively about material strategies that will help you be more efficient.

From vendor managed inventory and asset repairs to logistics and outsourced asset coverage. It’s all been discussed.

These strategies are high level. They require a lot of discussions. A lot of individual preferences due to unique operational needs. And a lot of time to set up.

But the end result, they have a huge impact on the costs of your operation.

Start smaller.

Right now, you can start with your sourcing, processing, chase and trace strategies.

Focusing some attention on these areas will save you a ton of time and money.

We recently had a client 4,000mi from us procure various components from us. About 15 lines in total. They decided not to purchase 2 other items from us. 

Our Dedicated Account Management team followed up just to make sure they resolved their needs for those items.

They did. They went to another vendor. That’s fine.

For these particular items, we were slightly higher priced, but no more than $100 total for the two lines. Based on our estimates, they spent an additional $100 to process 2 separate orders and another $200 in freight.

They also had two more orders to follow-up on, two more POs to track and trace, two more POs to receive in and allocate, you get it.

Was that worth the cost? I think not.

This story brings me to the conclusion of cost.

Look at what items will cost you. Is there a way to be more efficient at a higher price but at a lower overall cost? Absolutely.

Always choose that option…

Are you stuck on price? Confused on the differences? Comment below.