In business, rarely does a customer simply purchase an item. What customers really buy is the satisfaction they derive from your product or service. Customer are mostly concerned with what they get in exchange for what they pay. To determine the true cost of providing a product or service, you have to understand the true costs of providing satisfaction or value to your customer. True costs goes beyond a customer’s purchase but should include all the costs that has to be incurred to provide maximum value to the customer. This includes all the cost used to provide the product or service plus cost of maintaining the product or service (follow up). Imagine if you had a product or service you never supported! Customers might come to you for a cheaper price but they will not stay because they are not able to fully utilize your product or service. In business, you either provide all the things needed to increase utility or your customer will go somewhere else to find it.

To effectively control costs, a business needs a cost analysis which:

• Identify the components of the value chain: Break down your business into smaller parts used to provide value to your customers. Figure out which parts produce the most value and eliminate the parts that don’t increase value to the customer
• Define value as what the customer pays for rather than in monetary or accounting terms.
• Classify cost based on value creation, more attention should be given on the components that increase value to customers.

Knowing what it costs you to increase the utility of your product or service, enables you to plan accordingly. The more in tune you are with your customers, the better you can serve them.