Price Vs. Cost

Tuesday, March 10th, 2009

Price Vs. Cost

When I was in college I took an Economics class and learned a valuable lesson that has helped me throughout the years. It’s helped me in both my business and in my personal life. It is a simple concept, but one that some people seem to be forgetting these days.

What I’m referring to is Opportunity Cost. Let me explain what I mean… Often, the cost of something is considered in terms of money. The opportunity cost of something is based on what must be given up as a result of my choice. Any decision I make that offers me a choice between options has an opportunity cost.

Here is an example that I often refer to when thinking of this theory. For almost 9 months of the year (the beauty of living in Houston), the yard at my home needs to be mowed once a week. I see that I’m given two options – Either spend my weekend mowing, edging and bagging my yard or spend time with my family.

To Mow or Not To Mow...

So, what do I do? What choice do I make? This brings me to Price vs. Cost…

In my opinion, both options need to be done. I must have a well-kept yard and I must spend time with my family. However, I’m the only one that can spend time with my family – I can not hire that out. I can hire out the yard work – but at what cost? Or should I say – at what Price? My opportunity cost for doing my own yard work is foregoing time with my family. There is no price associated with this. My opportunity cost for spending time with my family is the yard work. There is a price associated with this.

So, I’m presented with the choice. Spend about $100 per month for someone else to do my yard work and use the time I would have spent doing the yard with my family. Bringing the girls to the park, creating memories with them, spending time with my wife, etc… is far more important to me than the $100 per month in yard fees.

The way I look at it is this – the cost of doing my own yard is much more than the price (but don’t tell my yard guy or my rates will surely go up).

Price = $100
Cost = Not spending time with my family and missing out on the really important things in life.

Where am I going with all of this?

Lately, the economy has been suffering and this often means that people will evaluate spending and find places to save money. My advice is to be sure that the money you are saving by “doing it yourself” makes sense. What are you giving up in Opportunity Costs just so you can save a few dollars?

Understand the difference between price and cost and make smart decisions with your time and your money.

Till Next Time,

Eric

Tags: Business, courier service, Decisions, Family, Opportunity Cost, Price Vs Cost

Posted in Theories | No Comments »