With Father’s Day coming up this weekend, many people are likely to be ordering gifts.  As a result, it seemed like a good day for us to talk about price and cost.

Suppose that you are buying a gift online.  In many case, you incur shipping and handling, taxes, and the cost of a gift card when you buy online.  These costs can greatly impact how much you pay.

Let’s consider a $30 item.  That is the price of the item.  Is that the cost though? 

Price of item:                  $30.00

Taxes:                              $  2.40 

Card:                                 $ 3.75

Shipping & Handling:     $  8.00

Total Cost:                       $44.15

As this example illustrates, the out-of-pocket costs can add 50% to price.  Do the math for yourself at Harry & David. 

Two issues to watch for when it comes to shipping and handling are: 

How the cost is calculated.  At Harry & David’s shipping and handling is calculated based on the price of the order.  It is an easy way to calculate shipping and handling costs.  If higher priced items require more packaging, special preparation for shipping, refrigeration during shipment, or other care, this would make sense.  In many cases, there is little correlation between the care required and the price of items so it is difficult to justify this method of calculationg shipping and handling from a customer’s perspective.

Expedited shipping can more than double the price for shipping and handling.  While many customers are willing to pay more for expedited services, doubling the price of expedited shipping can be counter-productive.  Customers may be willing to pay $8 for the shipping, and unwilling to pay $16 for shipping.  Firms have to be sensitive to what their customers value.

Higher financial cost may be justified from a customer’s perspective if the perceived value is high enough.  The value can come in a variety of forms such as:

Time savings

Convenience

Quality of the items

Performance guarantees

What does this mean for your business?  How can you use this information in dealing with your customers and suppliers?

As the Harry & David’s example shows, “price” and “cost” are not interchangeable terms.  This explains why, rather than looking at price, organizations often focus on cost or on “total cost of ownership” when they are purchasing products and services. 

Filed by Coleen Davis at 9:45 am under Business Acumen, Current Events, Gifts & Recognition, Planning Tips, Solving Problems