[Tweet “Cost and value analysis is always a viable starting point in making important purchasing or investment decision.”] The key driver determines the decision. How would you evaluate costs in relation to value? What is your driver? Which do you rate higher? Cost or value? In making business decisions do you always look at the cost of the decision or the value the decision or action would deliver for your business.
The economic definitions of these concepts and their daily use can be confusing and in some cases they are used interchangeably with words like ‘worth and price’ . Ali Luke in his post gives a very good analysis of the difference between cost and value
I am sure you have all heard the phrase, always sell on value not on price. Do you ever stop to consider for a moment when making personal decisions the cost of the decision or the value you would derive from the decision.
I wish I could answer that value always outstrips cost. Or that cost should always be the overriding consideration in making business or personal decisions. The reality is that when we are faced with these situations, most of us rarely give deep thought to the analysis. Anecdotal evidence I have suggests that most of us will always look at the cost of an action, decision, purchase. We rarely give deep thought to the benefit the product or service will bring. This is probably because in most cases either the cost is not a huge financial burden or the value is so tangible it’s a no brainer.
The big difficulty is where the financial outlay is huge and you have to make the purchasing decision or a decision with huge financial implications. No one has the benefit of hindsight when making such decisions and the biggest driver I find for most of us is the cost consideration. I have been there and I know exactly what happens when faced with such decisions. Let me tell you a story.
The Value v Cost Decision Making Process
I have told this story to my close friends only because it was pivotal in my view the failure of our food business. I want to share it with you because I think it could be instructive in this ‘cost or value’ proposition.
This is what happened. We had big cash flow problems which was adversely affecting our ability to meet our short term commitments. We thought of many options to deal with the problem. Our bank relationship manager at the time sold us on the idea of invoice financing or factoring. This would have released a very tidy six figure sum into the business immediately secured on the value of the invoices owed to the business..
However, there was a ‘tiny’ obstacle. We had to review, update or overhaul our accounting systems in order to access the facility. When we investigated the cost of the upgrade/replacement, it was in the tens of thousands of pounds. The biggest proportion of the cost of the software change was attributed to data migration or data entry. We chose the least cost option. This ended up taking nearly six months complete. By this time our business’ financial profile had altered and the facility was no longer available. It was the death knell for the business.
With the benefit of hindsight, I now know that that was a very poor decision on our part. This ended up dealing a fatal blow to our business. Apart from the huge financial loss, it also meant that we had to lose staff and became indebted to several suppliers who had almost become like family to us. Suffice to say, it was not a pleasant time.
Another good example is the Lekki-Ikoyi Bridge that links two parts of a huge urban metropolis in Lagos, Nigeria. The bridge which is very beautiful by the way (pictured above), was constructed at huge cost to the government. However, the value and benefits that it gives to residents in terms of man hours gained, convenience and pleasure is immeasurable.
If you ask me today, what do I focus on, I now say unequivocally – ‘value’ rather than cost. This is not only because of my own personal lesson, but because if you carry out an objective analysis, you will find that the key to lasting efficacy or legacy is the value a product or service brings to the table. No matter how expensive an item is, if it does not add value to the process or situation it is meant to serve, it is almost meaningless.
If you focus on value, it is almost always certain that in the long run, the long term benefits you derive will always outweigh the initial cost. At the same time, there are situations where the cost far outweigh value in every conceivable respect. These are the situations that completely justify the expression, ‘there is no value in continuing with this project’
Do you sell on value or on price? What has been your experience? Leave me your comments please either below or on my facebook page.