You Cannot Get a Good Deal By Looking At Price Alone

Hey Buddy, I’ve got a deal for you on a factory second parachute.  Just 40% of normal retail. 

A complete parachute will retail in the $9,000 range so this may be interesting. Assuming you want a parachute, should you buy it?

Not without a lot of further research.

When you buy anything, you want known value.  In this case, the ability to float gently to earth from a great height.  Every time.

You give up cost to get value.  Cost is a basket of things, one of which is money.  The other things include high maintenance commitments, difficulty in dealing with the supplier, (they are far away)  reliability issues, fashion, inconvenient to use, and many more.

When I evaluate a purchase I should match my entire cost package against my entire value package.  Perhaps the cost over the lifetime of the product.  Total cost of ownership includes much more than the initial purchase price.  Ask someone who owns a cottage.

Back to our parachute vender.  If I buy from a reliable supplier I can expect to have my cost be pretty much equal to my price.  I trust reliability, service and all the other things to be there in the price. But the price is $9,000.

When I buy off the back of a truck, my cost may be more than just the money.  Some of the other things I count on may be missing.  I will have added the cost of risk in order to get the price reduction.

What if 40% of the regular retail price means the parachute will work about 4 times in 10 jumps?  The $3,600 price is no longer attractive.

There are more things than parachutes that people would not buy cheap if they knew what went missing to meet the new price point.

Cheap furniture, cheap car repairs, cheap drugs, cheap advice.

People who shop based on price alone invite disappointment.  A fundamental rule of life is that you cannot get back more than you give up. If you could get more, the purveyors would all disappear and almost instantly.

I regularly hear that life insurance is too expensive.  Insurers make too much money.  They all have big buildings and fancy titles for their executives.

Here’s the deal.  I could arrange insurance you care about with a company that is losing money.  Does that feel better?  Maybe a nice high rate term deposit with a Greek bank instead?

.

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Contact: don@moneyfyi.com  |  Follow Twitter   @DonShaughnessy

Don Shaughnessy is a retired partner in an international public accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario.

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