Difference between Price and Cost

Updated on June 27, 2017

The statements “How much is the price of this book?” and “How much is the cost of this book?” sound like there really is no difference between the two. However, did you know that “price” and “cost” are completely different and are not actually interchangeable? If you didn’t know this, you’re in the right place. In this article, we will discuss the difference between the two.

Descriptions

Price

Price, also known as “sale price” or “selling price,” refers to the quantity of payment given by the buyer to the seller in exchange for a good or service.

Historically, the price of a product or service was not only in monetary form. Trading goods such as vouchers, stamps, spices, and even cigarettes were used as currency for trade or barter. Nowadays, prices are indicated in a form of monetary currency per given unit (e.g. $4.00 per piece, $99 per kilo, $50.78 per sack).

Price is the basis of any commercial transaction. Let’s say you want to buy a laptop for $1,000 from a store named TechGuru. As the buyer, you will have to give the price, $1,000, to TechGuru for you to receive the laptop.

The price of a product or service is determined by several factors:

  • The amount the competition charges for the same product or service
  • The nature of the good or service
  • The target market’s capability to purchase
  • The cost incurred to produce the product or perform the service
  • Other external factors like laws and regulations, economy, etc.

For the business’s financial gain, the price of a product or service also includes the markup amount. Say you own a business that engages in buying and selling second-hand books. If you pay your supplier $10 for each hardbound book, you can add a certain amount to the original $10 for your business’s profit. This means you can sell each hardbound book for $15 or $13 depending on the other factors stated above.

However, it is important to remember that the customers also get to determine the price of your products. If the price of your product is too high you might end up piling up unsold stock until you reduce the price to an amount that matches the customer’s perceived value. Continuing the example above, if you sell each hardbound book for $30 (because you want to gain money quickly), your customers will likely not purchase your books.

On the other hand, cost is the amount of money that a company spends to produce a good or perform a service. It is the monetary equivalent of the effort, materials, resources, time, utilities, etc. utilized in creating a good or service.

Say you sell handmade stationery. The cost would include the amount you spent on the materials such as paper, a cutter, scissors, glue, labor, etc. If you sell customized pack lunches, the cost would include the container, vegetables, fruits, water, electricity, gas, etc.

The cost of a product or service goes hand in hand with the price. As mentioned previously, the cost of a product or service is one of the factors that determines the price. If the cost to produce one bar soap is $12, it would not be practical to sell the item for the same price. This is because the difference between the price and cost should result in the seller’s profit or financial gain. If an item’s cost is higher than its price, the business can be considered unprofitable. If the cost equals the price, you will not lose or gain money.

Price vs Cost

What, then, is the difference between price and cost?

Price is what a buyer pays to the seller in exchange for a product or service. It includes the seller’s markup amount for profit and is calculated based on several factors such as the price acceptable for the seller and the buyer, the amount the competition charges for the same good or service, the nature of the good or service, the target market’s capability to purchase, the cost incurred to produce the product or perform the service, and other external factors like laws and regulations, economy, etc.

Cost, on the contrary, is the monetary equivalent of the seller’s effort, time, materials, resources, etc. to create a good or perform a service. It does not include any markup yet but is one of the bases to determine the price of a product.

When you go to a store, you should ask for and pay for the price of the product and not the cost. The cost is the seller’s concern and not the buyer’s.

Comparison Chart

PriceCost
The quantity of payment given by the buyer to the seller in exchange for a good or service; also called “sale price” or “selling price”A company’s total expenditure to produce a good or perform a service
Determined by many factors such as the acceptable amount for the seller and buyer, the amount the competition charges for the same good or service, the nature of the good or service, the target market’s capability to purchase, the cost incurred to produce the product or perform the service, and external factors like laws, regulations, economy, etc.Calculated by adding the monetary equivalent of the seller’s effort, materials, resources, time, utilities, etc. used in creating a good or service
Includes the seller’s markup amountDoes not include the markup amount