IT Purchasing: How to Tell the Difference Between Price, Cost

Renee Wagner
Vice President, Business Development

Often times, I hear people use price and cost interchangeably to describe what they will pay for a given good or service. In reality, price and cost are two very different things. Particularly when you are considering a larger purchase, you should not confuse the two.

Price is the dollar amount that we are willing to pay to acquire a given good or service. The salesperson says, “The price for this service is X.” So we think this service is only going to cost X. But in most cases, price is just the start of an investment.

The total cost of ownership includes the price you pay for the item itself, plus whatever you’ll lay out in maintenance, upgrades, insurance, and any other expenses necessary to gain value out of your initial investment.

Think about buying a car. You might feel good paying $45,000 for a car instead of a comparable car that costs $50,000. But did you really get a deal? That price doesn’t include gas, maintenance, and insurance for the life of the car. If it gets poor mileage compared to the slightly pricier car, or requires more maintenance or higher insurance premiums, that great price you got isn’t so great anymore.

Price vs. Cost in Business Technology

Well, the same holds true when investing in your IT infrastructure. Vendor A wants you to replace vendor B’s networking gear with his. Vendor A can get the price way down for you with competitive displacement discounts, new customer pricing, trade-in value, and management approval. Great. It might be half the investment you initially made in vendor B.

But what is the cost?

To determine what your cost is going to be to move from vendor B to vendor A in any network deployment, consider these things. How much will it cost to:

  1. Remove and replace your existing networking gear with the new networking equipment? This cost should include not only the man-hours of your staff, but the cost of bringing in a vendor who knows the new gear, since your current IT staffers probably don’t have the expertise required to install it on their own.
  2. Ensure that moving to a new vendor doesn’t impact interoperability with your customers and vendors?
  3. Train your IT staff on how to use and manage the new networking gear? This cost is ongoing as the new vendor upgrades its products over time. So the initial training is just the start.
  4. Determine the impact to your end users, and the other systems that are attached to your existing network? Even more importantly, will everything continue to operate as it does today once you make the change?
  5. Conduct an impact study to determine the impact of these changes?
  6. Provide ongoing support and maintenance for the new networking equipment?

You’ll be asked to measure and justify the total cost of ownership for any IT project you deploy. So, hopefully you are beginning to see the drastic difference between price and cost. While most of us have some awareness of the difference, over time we all tend to lose sight of the impact this difference can have on our long-term IT investments.

My advice: When you are being presented with a new offering, request a detailed breakdown of the long-term cost of making that investment. If you present the actual cost up front when seeking budget approval, it will help eliminate questions about ongoing costs. If you don’t present ongoing costs early on, questions may arise internally as you (and those above you) incrementally discover the true costs of a given solution.

Most salespeople probably cannot give you the actual cost for their solution right off the bat. They will try to keep you focused on the great price they are giving you. If they can’t, or won’t, work with you to explore true cost for their solution, find another partner. It’s that simple.

Ultimately, you may well be held accountable by the organization, or board, for the cost to the company. If the vendor cannot support you from the start with the information you need to justify the cost of a new solution, they probably won’t be there when you need them most.

For a deeper conversation on understanding the difference between price and cost, feel free to reach out.

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