Mixing Water and Electricity
In my twenties, I lived in Guatemala. Not everything was up to code, including the hot water. To heat water for a shower, the heating element was built...
...wait for it...
right into the showerhead.
Most of the time, this worked fine.
But when the heating element wasn't connected properly, turning on the faucet meant getting a low dose of electrical current along with your shower. Not ideal.
Electricity and plumbing are two separate systems. Mixing them creates danger.
Sometimes, accountants do the same thing with price and cost.
Most accountants arrive at price through cost. They intertwine the two as if they belong together. And just like mixing electricity and plumbing, this creates a problem.
When you combine pricing and cost, you end up with a low-voltage jolt of constant overwork. Prices end up too low. You're perpetually underwater, grinding just to stay caught up.
Here's why.
Pricing and cost operate on completely different logic.
Think of cost as a measure of delivery inefficiency. The lower the cost, the more efficient your delivery.
Price is a function of value. High prices are only accepted when the value is high.
When you start with cost and add a markup, you're optimizing for the wrong thing. You're asking, "How much did this cost me?" and adding 30%. That ignores the question pricing should actually answer: "What's this worth to my prospect?"
If you redesign your firm to be incredibly efficient, your cost drops. And if price is tied to cost, your price drops too. That's backwards.
If you've figured out how to deliver tremendous value, your price should reflect that, regardless of cost. That's the right direction.
Keep them in their own lanes. Efficiency drives costs down. Value drives prices and revenue up.
Combine cost and price at the risk of that low-voltage jolt; constant overwork, thin margins, and the nagging sense that something's wrong with your model.
Because something is. Electrical and plumbing aren't meant to mix. Neither are pricing and cost.
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