One of the things that we believe to be important for project management is the proper understanding of the relationship between cost and price. In this post we will try to clarify the meanings for these two words.
Price is the amount of money or something valuable that a customer is ready to pay or give in order to receive something valuable from you. In terms of software project management, the thing that the stakeholder receives is the project being done, and the things that the customer and stakeholders receive are the results of the project – be it either goods or services. Money is what usually paid for doing the project. At the same time, Cost is the amount of resources (equipment, materials, money, people, etc) that are utilized in order to produce goods or services, the deliverables of the project.
Now let’s explore a bit what the relationship between cost and price is. Suppose your company would be satisfied with the total project cost to be 85 percent of the selling price. Firstly, you should ask about the origins of your selling price; whether your sales & marketing department tried to get the highest price they could, or they were satisfied by getting the reasonable 15 percent markup from the customer.
An Israeli business management guru, Eliyahu Goldratt, said in one of his books (It’s Not Luck) that the price of any thing should be determined by “the perceived value to the buyer.” This means that the selling price of a product or service should be determined by what the customer and the stakeholders are willing to pay for it. As soon as you determine what the stakeholders are willing to pay, you then need to determine whether the engagement is profitable enough for your business. In order to determine this, you must determine cost. It is important that the stakeholders pay the price corresponding to the value of the goods or services they receive, especially, in the beginning of a product life cycle or when a new service is being offered for the first time. It is also important to have the deliverables of the project produced for the minimum cost.
While this may leave an extra profit, it is important for the company’s future to use these extra profits as an investment in improving the company’s ability to deliver future projects for less cost. Eager to be ahead, competitors will be willing to entice your customers away from your company by reducing the price to them. This is why your company should be ready to make cost improvements in order not to lose a major market share.
Thus, let’s summarize and specify a couple of things that are important in regards to cost and price. First, we expect the customer to pay a price that is equivalent to the perceived value of what they receive; and second, the company doing the project (or providing the goods or services) invests the extra profit in its ability to reduce costs as the product matures and competition saturates the market.
Stay tuned and good luck with all your endeavors,
Softheme team
See also: Offshore Software Project Management for Customers
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