Cheap Is Not Inexpensive

Seth Godin recently commented on  businesses that compete on price.  His thought,

The race to the bottom is unforgiving and relentless.

Once you are involved with that, it is near impossible to stop.  The key understanding is, don’t play the game.  It is easy enough to see why it is foolish to play and it is a bit harder to see why.  It is foolish for providers and paradoxically for their customers, too.

People, even those seeking a low price, really are seeking highest value per dollar of expenditure.  That is quite different than “lowest price wins.”  Price is quantitative and value is qualitative.

The problem arises when people equate price with cost.  They are not the same thing.  Not even close usually.  Cost includes price as a component, but total cost is what you give up for value.  It could include missing guarantees, predictable outcomes, ease of use, convenience, and a contact person.

Anyone can reduce value and price.  That is easy and people know that, but sometimes seem to ignore the relationship.  Mid 1800s English commentator, John Ruskin sums it up like this.

“It’s unwise to pay too much, but it’s worse to pay too little. When you pay too much, you lose a little money – that’s all. When you pay too little, you sometimes lose everything, because the thing you bought was incapable of doing the thing it was bought to do. The common law of business balance prohibits paying a little and getting a lot – it can’t be done. If you deal with the lowest bidder, it is well to add something for the risk you run, and if you do that you will have enough to pay for something better.”

It is okay to pay less when you know what values have been removed from the product and you won’t miss them.  (I just bought a printer for $150 less than the same one that permits printing from a USB stick.)  A cheap factory second parachute with misprinted colors is not the same thing as a factory second parachute with lines that will break.  Cheap insurance where the covered events are narrow or where the insurer gets another kick at underwriting with a pre-existing condition clause, are not like more general ones where underwriting is done before issue.  If the risk matters, do not add more risk with the product you buy to deal with the first risk.

Buying stock you heard about in a bar is cheaper than using an advisor who understands portfolio design, but more risky.

Not very customer is seeking best value.  Some really think a low price is better.  Rather than pursue those price seekers, walk on by.  They are nothing but trouble.  Work at adding value to your offering.

Sometimes it will be an efficiency that allows you to lower price without reducing value.  Sometimes the price must go up to accommodate a new value.  Sometimes a value that no one wants can be removed.  I saw an example of that years ago.  A major auto maker offered an option that was seldom purchased.  How seldom?  Seven times in the previous million vehicles.  It took a near act of God to take it away, but the cost to keep it was vastly more than its value to marketing.

Help clients know how to exchange total cost for total value.  No one can please people for long with low price for unknown value.

Don Shaughnessy arranges life insurance for people who understand the value of a life insured estate. He can be reached at The Protectors Group, a large insurance, employee benefits, and investment agency in Peterborough, Ontario.  In previous careers, he has been a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business.

Please be in touch if I can help you.  don@moneyfyi.com  866-285-7772

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