What is the Difference Between Price and Cost?

In a nutshell, price is what you pay for a product or service at the moment you pay for it, and cost is what you pay for that same product or service over time.

Let's say you decide to go to a store to purchase a TV because you just saw that it was marked down 25%. The amount you paid for the TV is $1,392.11. That is considered the price. When you add a 7.75% sales tax, your adjusted price is $1,500.00.

If you paid cash, then the price and the cost are the same, theoretically. The reason I say theoretically is because there is an opportunity cost that exists, but that is outside the scope of this example.

If you're like most people, you paid for the TV with a credit card, even if only to receive a 15% discount for opening an account with that retailer that day.

The following chart shows that if you financed the $1,500.00 and paid the minimum payment of 4% of the outstanding balance, a fairly standard formula for calculating a minimum payment, your initial monthly payment is $60.00.


Assuming that this is the only purchase you made with that credit card and you made the minimum payment until the balance was paid is full, it would take you 87 months to pay the credit card off. That would mean that you paid $2,274.00 for your TV. This number represents the cost of the TV.

That means that you paid $774.00 ($2,274 - $1,500) in interest over that 87 months. If you purchased that TV at 25% off and the price you paid was $1,392.11, then the original price was $1,740.14 ($1,740.14 - 25%). The 25% discount you received was $348.03, but you paid $774.00 in interest. Not only did you NOT save the 25%, you paid an extra $425.97 ($774.00 - $348.03) for the TV.

The opposite side of the chart shows the results if you had paid $100.00 per month instead of the minimum payment of 4% of the outstanding balance. In that example you would have paid the account off in 18 months and you would have paid back $1,712.00 for the TV. That $1,712.00 would be the cost of the TV. The interest would total $212.00. As we showed before, the 25% off saved you $348.03, but you paid back $212.00 in interest, so the real discount was only $136.03.

Credit has a cost and it can be a rather steep cost. This is just one example. This scenario is played out daily by millions of people all over the world.