Cost

Cost is the money a business spends when making a product or providing a service. It covers materials, labour, packaging, energy and the machines used to make the product.

Cost is not the same as price. Price is what the customer pays; cost is what the business spends. A business can charge a high price but still make little profit if its costs are high.

Keeping cost low

Low costs help a business in two ways. It can keep more of the price as profit, or it can charge a lower price than rivals and still make a profit. That can attract customers who care most about price.

For example, a business making reusable water bottles spends £4 on the steel body, £1.50 on labour and £0.50 on the cap and packaging, so each bottle costs £6 to make. It sells for £12, giving £6 profit per bottle. A simpler design uses less steel and a lighter cap, cutting the cost to £5. The business could keep the £12 price and make £7 profit, or lower the price to £11 and still make £6 while looking cheaper than rivals.

Cutting too far

Cutting cost too far can backfire. A cheaper cap might leak, so customers return bottles, leave poor reviews and stop buying. The business then pays for replacements and loses sales. Cost has to be balanced against how well the product works and how it looks and feels, so the lowest possible cost is not always the best choice.

Prioritising low cost suits customers who value low prices, but it can put off customers who want a product that lasts.