Difference between value and cost

It really frustrates me that people do not understand the difference between cost and value, to the point it makes me want to shout! It does make me angry. The accounts department in a company are often accused of only being interested in cost and profit, but the good accounting people understand the concept of value

Superficially it is easy to save money, spend less and it is done. This works where you are spending money on things you do not need and it is common sense to cut that cost out. I trained as an accountant that is perfect.

Value

When you are saving money by replacing a product that you buy and use though, it is not always that simple. You need an understanding of the intrinsic benefits of the product. A basic concept of marketing is that people buy value, the perceived benefits of the product have to outweigh the perceived cost and the cost is not just in monetary terms. Buying a sandwich in your half an hour lunch and that queue of 20 people moving slowly in front of you will probably send you to alternative sandwich shop. This is not a judgement on money but instead the cost of returning late to your desk and the disciplinary that may follow.

Example

Background

I sat in a meeting just under a year ago (2018) with people from a section of the NHS, we sold them a product that helped save lives but it had run out of tender in 2015.

They wanted to save money, UK NHS has been on this path since 2010 in austere times. In 2015 it transpired they wanted a tender through some agency in a very generic contract that didn’t recognise this was a very important safeguard for patient’s lives. We argued against this and got them to tender properly.

Then they did the tender process very slowly, we’d had the specifications of the products and tendered, but then it took until August 2017 to find out we had lost the tender, we had been supplying normal volumes on a regular basis to keep them going.

We’d lost, it transpired an alternative product was, we believe, about 33% cheaper, we were still supplying though, right through to that meeting in 2018.

Problem

The problem was they had written a basic specification that meant this alternative product could tender. What they hadn’t done was show the product to the people that used it. Our product was a clear Yes/No reading, the new product required subjective analysis about two shades of blue.

Value

The value of our product was in twenty years of unblemished excellent customer service, it was clear and easy to use and it was reliable but if you make a decision purely on cost you do not see these things.

Hidden Costs

Then there are the hidden costs, training on the new system, consultants being called to say whether the label could actually be used, I doubt those consultants were cheap. The effect on morale on the staff that were having the change forced upon them.

They followed up that meeting by asking for a further six month’s supply to September 2018, three years after the initial contract had run out. That’s three years with no savings and only costs, both hidden and obvious. That’s three years of dealing with people who didn’t appreciate that cost and value are not the same thing.

View the big picture

The moral of this story is to weigh up the bigger picture when trying to save money or even spend it. Try and work out what the hidden reductions in value and costs are, talk to the people that will be affected, and understand the total effect on not just the immediate department involved but the company as a whole. As I say frequently business is holistic and often decisions affect many parts of the business.

Conclusion

It’s not a cost saving if you destroy more value than the monetary amount you save.

Actions

If you have found this post helpful, please share on social media using the buttons above.

For help with any aspect of increasing value with or without reducing costs email contact@bonafidebd.com.

Click here to browse our other posts for more useful information.

Follow Bona Fide Business Development on Twitter here.

By |2019-02-18T09:27:33+00:00February 15th, 2019|General Topics, Marketing, Personal Story|0 Comments

About the Author:

Leave A Comment

This site uses Akismet to reduce spam. Learn how your comment data is processed.