I sit on a cost optimization committee and one of the recurring debates is always about price. You would almost think it is a price optimization committee. I have always had to remind members that the committee should be focused on cost, and not just price. I use the below basic equation to explain my thought:

Cost = Price/Utility^Perception

Cost is the price of anything divided by the utility (usefulness) of that thing raised to the power of the user’s perception.

Since we are coming out of the covid-19 era, let us use toilet paper as an example.

There is marked difference in the price of toilet paper from different manufacturers on the shelf, even with the same brightly colored specification of 2 ply.

If you make a purchase decision based only on price, you might ultimately have a higher usage rate, because the lowest priced ones are also quite thin, ensuring you need more rolls for every use.

In terms of utility, all toilet rolls get the job done, ultimately.

But the perception of the user, based mainly on the feel and bruise (or not), has a disproportional impact on the actual cost of that purchase.

Those that make decisions solely on price, force their perception to align with that choice, and this always creates self-conflict. Such people try to resolve that conflict by castigating those who go for a product with a higher price, same utility, but with a disproportionately positive perception. They envy the overall satisfaction in other’s purchase, because they cannot marry it to the higher price.

A product that has a low price, adequate utility, but triggers a bad perception, will be abandoned. The cost of abandoned products goes to infinity.

One of the reasons companies stack up inventory is because they are more price-focused than cost-focused. They have inventory bought at the lowest price, but the shopfloor will rather avoid, because of a poor perception, even though utility might not be affected. Instead of working on improving that perception, they resist that perception and throw insults around about people not being cost-conscious. No, the shopfloor inherently understand cost better.

2 things can be the same price, have the same utility, yet cost differently, based on perception.

You can buy a BMW and a Mercedes for the same price and same functionality, yet, while one gathers dust in the garage, the other is taken for a spin with pride. One is an avoidable cost and the other is worth every penny.

– Osasu Oviawe