What is the difference between cost and price?

Cost is the expense that a business incurs in bringing a product or service to market. Price is the amount a customer pays for that product or service. The difference between the price that is paid and the cost that is incurred is the profit the business makes when the item sells. If a customer pays $10 for an item that costs the company $5 to produce and sell, the company makes a $5 profit. As prices climb, the cost of living increases.

When calculating the cost of goods sold, a business must add the cost of everything necessary to produce that item. In the case of an appliance, this calculation would include the parts, the labor to assemble the item and the appliance's transportation from the factory to the retail location. If a business runs a retail store, the cost of the item also would include a portion of the building's operating expenses and the sales associate's salary. For items that are sold through a website rather than a physical store, the expenses of designing and operating the site are included in the cost.

Business owners must factor in their cost when setting a price, but the customer ultimately determines the price. Items that are priced too high may remain unsold until the price drops to a point that matches the customer's perceived value, which is what customers believe the item is worth, given their current cost of living.

Companies can validate their pricing decisions by educating customers about the process of bringing a product to market. If a product is more expensive because it includes extra safety features that are labor-intensive to install, companies can show how a higher price represents a better value to the customer.