Despite what you may think financial mathematics is tricky business – it’s not the tuck-shop maths we are used to.
In its complexity, one of its branches that is often done wrong is costing. As you can guess from the name it means the science of finding how much a product/something costs you.
It is a science that has oft been on the receiving end of much abuse with the comparison between the costs of DStv versus the cost of online streaming being a good example. Most people think of it this way:
To make it easier to make comparisons we have created the following list of assumptions
- You already have a TV
- You do not have a decoder or existing internet connection
- You live in an area with Fibre coverage. Wimax works too but we will not use it in this comparison
- You will be watching HD content at 720p (1280 x 720 px)
- You like US and UK TV Shows as well as documentaries
- Some in your family want to watch Nollywood productions
- You are a sport fanatic
- You will be using a DStv Explora
The basic comparison
|Monthly Subscription||*83 (72+11)||Monthly subscription||**180( 155+2+12+10)|
|First Month Total||348||First Month Total||280|
|Subsequent payments||$83/month||Subsequent payments||180|
NB * DStv Premium bouquet plus PVR Access fee.
** ZOL Unlimited Fibre (Wimax 5 Mbps or even 3 Mbps works with 720p on demand viewing, streaming can be tricky though) $155, Uhurutv unlimited $10/month (Sports and Documentaries), Netflix HD $12/month (TV Shows) and iRokoTv $2/month (African Movies)
Is this right?
Well yes and no. Assuming you are just an ordinary citizen who does not need an internet connection this would be the correct assessment. But if you really take time to think about it, for most tech people this is not really true. To really come up with accurate figures you will need to know all about sunk, unavoidable and relevant and irrelevant costs.
Sunk and unavoidable costs
A sunk cost is a cost that has already been incurred e.g you have already paid your internet connection due to the nature of your work. An unavoidable cost is a cost that will have to be incurred regardless of whatever decision you make e.g. you will pay for an/some sort of internet connection whatever decision you make.
Relevant vs Irrelevant costs
A relevant cost is a cost that is affected by the current decision i.e an avoidable cost. Irrelevant costs refer to sunk and unavoidable costs.
Factoring these into your decision
Let us say you operate an internet business from your home office and have a ZOL Wimax business grade connection for which you pay $115/month. You also own a DStv Decoder and are a DStv premium subscriber paying $83 a month. Should you consider online streaming or not?
The costing process
|First Month Payment||198||First Month Payment||280|
|Subsequent Months||198||Subsequent Months||180|
Like in the case above we are assuming a set top box which would cost you around $100. In this case, streaming is actually cheaper! The moral of this exercise is that you should dig deeper whenever you are making financial decisions. Look at your own case carefully, being diligent to not only look at all the involved costs but their nature as well.
Sometimes the financial calculations show a tie (what we call an indiferent position in finance) or there are immaterial differences in the final cost comparisons in which case you will need to look at qualitative factors
For example, online streaming gives you the ability to binge watch shows, change your content providers, shop online, social media etc. With DStv, you can carry the decoder with you if you are going on vacation without calling a technician. You also do not have to contend with shaping.
Now that we are at the end the article, I feel the need to repeat what I said at the beginning : Financial Mathematics if a fickle. We have only provided one case study above but I hope you get the picture.
Image credit: Htxt Africa