OPINION: When price and cost wrestle

01 Mar, 2015 - 00:03 0 Views

The Sunday Mail

When buying, many customers often compare the price of substitutes and go for the cheaper one. This is especially so in our country, being a low-income economy with the liquidity crunch . . .

Put them in a ring to fight – price vs cost. Who is likely to emerge the winner?

Well, let them fight first. Can someone ring the bell!

But before we do that, perhaps let’s introduce the fighters to the spectators. On my right is price, which is that amount you see written on the price tags displayed on products on the shelves.

The ones you look at when you say Olivine cooking oil is “cheaper” than Safa.

Then cost, on my left, is all-encompassing. It takes into account the price, plus the after-purchase expenses associated with the product. Let’s say you have a choice to buy car A and car B.

The cars have similar designs, but are from different manufacturers.

Car A has a price of US$5,000 while that of car B is US$6,000.

When buying, many customers often compare the price of substitutes and go for the cheaper one.

This is especially so in our country, being a low-income economy with the liquidity crunch also biting painfully. Like in this case, the customer will presumably buy car A.

But let’s demonstrate how cost is important when making a buying decision.

Let’s say these two cars must travel for 500 000km before they become obsolete.

Car A has a petrol efficiency of 1L: 8km, while that of Car B is 1L: 15km.

And the price of petrol is US$1.40.

Which car would be cheaper, if we are looking at the cost?

Here, we can see that car A will need 62,500 litres (500,000km/8km) of petrol during its useful life of 500,000km. Car B will, however, need just 33,000 litres for the same useful life.

The person who buys car A will, therefore, have to pay fuel worth US$87,500 (62,500l x $1.40) during the useful life, while the one who buys car B will only have to pay fuel worth US$46,666 for the same amount of distance. Now let’s calculate the costs of these two cars by including the initial prices of the cars.

Car A will cost US$92,000 (US$87,000 + US$5,000), while car B will cost US$52,666.

Looking at price per se, it would appear that car A is cheaper.

But by looking at cost, we clearly see that car B is the cheaper one.

When you say that something is cheap, what factors would you have taken into account?

It is, therefore, always important to look beyond the price tag.

The sadza and T-bone that you may buy for US$1 at some filthy place and give you a running stomach – to the end that you have to buy medicine worth US$10 – is certainly not cheaper than the sadza and T-bone that comes at a price of US$3 at another clean restaurant which won’t give you a running stomach.

It is always very important for consumers to look at the cost, not just price, when buying.

Look at all expenses that you may have to incur after purchase and incorporate them in your buying decision.

The fight is now over.

The winner is chosen by you, dear reader. Price vs cost – whose hand shall you lift?

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