Founders, entrepreneurs, startups, and development teams, please distinguish between price and cost when designing your products and speaking with others.
“Okay then,” the salesman said eagerly. “The cost for this is $989.99.”
The customer held up the object of his desire, turned it slowly from side to side, and pondered his purchase. “$989.99?”
“Yes, sir. You’ll be delighted.”
“What else will I need?”
“Well, you’ll need batteries, of course, and eventually, refills.”
The customer thought. “Does it come with batteries?”
“No. That’s extra.”
“Do you sell the batteries?”
“Normally, yes, but sorry, we’re out.”
“Hmm. Is it easy to use?”
“Yea, easy, but we offer classes, too.”
“Are the classes free?”
“No, you have to pay for those.”
“So, okay, your price is $989.99, but I’ll have additional costs for batteries, refills, and maybe classes?”
“Yes.”
“I don’t know,” the customer said. “It sounds like a lot. Is there anything else?”
The salesman brightened, delighted at the question. “Well, yes! Let me tell you about our extended warranty program.”
We pay prices and incur costs.
A Call to Founders, Entrepreneurs, and Product Development Teams
In everyday use, we often use price and cost interchangeably. However, because a customer’s total cost is the sum of the price plus their other costs, I encourage founders, entrepreneurs, and product development teams to differentiate between the terms.
Total cost = price paid + the sum of all additional costs
In the scene above, the customer considered the price of $989.99, but he also understood that his total cost would be more than just the price; he’d incur additional costs, such as buying refills and the hassle of visiting at least one other store to buy batteries. His total cost will be greater than just the price. In this scene, it’s reasonable to believe this customer is unlikely to complete his purchase. His perception of the total value he’ll gain to his sense of the total costs he’ll incur might not be good enough for him to make the purchase. As a result of his perceptions, he may decide to purchase a competitor’s product, continue using his current solution, or simply give up.
One’s total cost is always greater than the price paid.
Therefore, product developers, please understand your customers’ complete life-cycle use cases, including not only your prices but your customers’ additional costs—from prepurchase research efforts to eventual disposal. If you understand and map your customers’ life-cycle use cases, you might find ways to reduce their total cost (i.e. price plus all other costs). Your insights might be valuable sources of competitive advantages.
Sorry salespeople, founders, and developers,
customers’ perceptions will always beat your data. Instead of pushing your data, use it carefully to help change perceptions.
Please click contact, if you want help answering these or similar questions. Finally, please leave a comment or send me a note if there is a particular subject or topic you’d like me to address in a future post.
Colorado Technology Ventures coaches and mentors founders and their startups.