Fully Loaded Costs

The notion of "cost" is understood to entail more than the money-price of a good or service, but it seems to be only vaguely considered from the perspective of the customer.

When it comes to their own activities, businesses are diligent in determining the fully-loaded cost of any proposed activity.  That is, a business purchasing a machine will include not only the cost of the machine, but the cost of the power to run it, the salaries of the workers who operate and maintain it, and the cost to dispose of it when its useful life has ended.   Cost accountants can be quite clever in identifying all the cash outlays that must be made in order to gain the benefit of a purchase.

I have never seen the same exercise performed with the same punctiliousness for the customer's evaluation of the fully-loaded cost of ownership.   It's likely because the firm feels that it is the customer's problem, and the customer's task to determine how much he ought to pay for something - though for a business that means to sell something to that customer, it's very much their task to predict this with better accuracy.

It's not that non-price costs are entirely ignored, just that they are dealt with very sloppily.   A firm that is seeking a retail location will show great interest in the distance a person will drive to shop a a given store, and will create bulls-eye maps that overlay population grids to determine a profitable location.   But willingness to drive is a rather imprecise reflection of the factors that cause a person to be willing to drive a given distance.  Driving to a store requires money and time - and it's highly likely that these can be calculated with greater precision than they presently are.

I have to concede that time, particularly a consumers time, is far more difficult to quantify.   When it comes to employees, the cost of time is their wage: if you pay them twelve dollars an hour, a task that takes thirty minutes to complete costs six dollars.   But because you do not pay customers for their time, does this mean that their time has no value, that it is worthless or free?  Perhaps to you, but not to them, and if you fail to respect the value of a customer's time, you will certainly fail to obtain or retain their patronage.

In comparing prices in areas that use different locations, economists pay greater attention to the notion of the value of time.   It is not merely a matter of converting the price in foreign currency to a domestic one, though that little trick often gets a great deal of attention from the ignorant:  things seem to be much cheaper overseas if you pay attention to the price and ignore the amount of time it takes to earn the money to purchase it.

Considered in that manner, it might be better to price a product in terms of the time involved - that is, in minutes instead of dollars.  A product that costs six dollars has a time-price of 30 minutes to a worker who earns twelve dollars an hour.   If it requires 10 minutes of driving (each way) and 20 minutes in the store, the product now costs him 70 minutes.   Add in the cost of gasoline and the taxes on the purchase, and it is now a cost of about 80 minutes.   Remonetize that, and 80 minutes at $12 an hour means that the "six dollar" product costs him $15.60 to obtain.   So the same customer would be better off paying nine dollars to purchase the product online and have it delivered to his home than he would to buy it for six at a store ten minutes from his home.

And this pertains only to the cost of acquisition.  The cost of use is another matter, which is the reason that products that are more convenient to use are of greater value to consumers.   A tool that will last five years and reduce the time required to perform a task that is done once a day by one minute represents a savings of 1,826 minutes of about $365 to the person who values their time at twelve dollars an hour.

I have the sense that I have become tedious - but these examples should underscore the point with which I opened: that the cost of a product is more than the money price, and significantly more in many instances.   Were this accounted for with greater precision, producers would understand the true cost of their product to the consumer, and have a more reliable measurement of the value proposition their product presents.