Friday, December 24, 2010

Cost Vs. Price Explained

Recently, while flipping through channels in my free time, I came upon a show called “Cupcake Girls” which combines two passions of mine - baking and business. On the surface, it seemed like another cupcake show, but just a few minutes into it, I realized that was far from the core of it. After allowing the viewers to have a peak into their business model and presenting a few scenarios with show’s accountant, I realized the show cleverly figured out a way to insert many business lessons into their every-day lives at the bakery. For anybody willing to pick up on the small details, it gave many great tips. The lesson which stuck with me most occurred in the meeting between the accountant and the ladies who ran the bakery. In the midst of some financial difficulties for the bakery, the accountant let the owners know that the more cupcakes they were selling, the more money they were losing. I was confused for a few moments, then disassociated from the show while pondering this interesting concept. I tried to understand what that meant. In that moment, I had a flashback to the business camp I took over the summer, and remember what my professor told me at Stanford. Cost is different than price. In this situation, the cost to bake a cupcake must have outweighed the price. I’ll take a moment to explain the differences.

In the consumer-seller relationship, the buyer’s focal point is on the price (how much they have to pay for the service or product-in essence, how much money goes out of their pocket) while the seller’s focal point is on the cost, the amount of money it takes to get the product to the consumer.

The price includes the money needed for the time and labor that goes behind the product. For example, when going to the store to purchase something, you actually indirectly pay for the amount it took to transport that item, the money that went behind advertising it, and some of the money needed to have a manager and employees at the store on top of manufacturing cost.

In contrast, the cost is the money needed to pay the advertisers, transport the item, and the money it took to pay the employees.

In conclusion, in this scenario, the owners of the bakery must have spent more money on the employee labor, the ovens, and the ingredients than they were making.

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