Current World Health Organization (WHO) guidelines for severe pneumonia treatment of under-5 children recommend hospital referral. However, high treatment cost is a major barrier for communities. We compared household costs for referred cases with management by lady health workers (LHWs) using oral antibiotics. This study was nested within a cluster randomized trial in Haripur, Pakistan. Data on direct and indirect costs were collected through interviews and record reviews in the 14 intervention and 14 control clusters. The average household cost/case for a LHW managed case was $1.46 compared with $7.60 for referred cases. When the cost of antibiotics provided by the LHW program was excluded from the estimates, the cost/case came to $0.25 and $7.51 for the community managed and referred cases, respectively, a 30-fold difference. Expanding severe pneumonia treatment with oral amoxicillin to community level could significantly reduce household costs and improve access to the underprivileged population, preventing many child deaths.