Why I Pay More For Everything

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In the book Freakonomics [Revised and Expanded]: A Rogue Economist Explores the Hidden Side of Everything, the authors say that morality is defined by how the world should work while economics is defined by how the world actually does work. People are driven by incentives and trade offs. No where is that more visible than in how I spend my money (and how you spend yours). In an ideal world, you and I would get the best prices on the highest quality products while enjoying the best possible service from a store we loved that’s staffed with people we genuinely liked. Obviously, this isn’t reality.

So why do I spend more? Why do you spend more? We are constantly seeking better and better deals on the products we consume and the services we demand. I’ve complied a list of why you and I both spend more than we have to.

1. Convenience. Sure, I could go to the grocery store or to Sam’s Club and buy a case of sodas. I could then ice them down and after a half hour, enjoy a cold drink of bubbly refreshment. In reality, I don’t have a lot of time and so I stop by a “convenience” store and spend 99 cents on a soda that I could have bought for 24 cents. Now I don’t stop in convenience stores very often, but for 75 cents (plus sales tax) I was able to get my drink without having to worry about ice, carrying around a cooler, or buying a whole case.

Convenience shows up in places like the batteries sold at Autozone, Radio Shack, or Office Max. Those batteries cost more than at Wal-Mart but if I really need batteries and they only cost a buck more, there is a level of convenience that I’m willing to pay to NOT have to fight the Wal-Mart crowds and NOT have to make another stop.

People buy pre-packaged meals for the convenience of not having to dirty up the kitchen and having a ready made meal in a few minutes. Never mind that it doesn’t even remotely resemble the picture on the box and it tastes like cardboard.

People are willing to pay more for convenience.

2. Terms. People will generally pay more if they can pay less per month on major purchases. It’s called interest. I pay more than the purchase price for my car and my home by paying interest on the amount I borrowed.

Some retailers, such as furniture stores and car dealers, don’t advertise their prices at all, only their monthly payments. People are willing to pay a little more if they only see the monthly payment and retailers cushion the total cost by breaking it down to its tiniest feasible amount.

For example: I was looking at a new mattress and almost swallowed my teeth when I heard the salesperson say the price was only “about 10 cents per hour.” What? I just saw a price tag of $2999. She proceeded to tell me that the mattress would last 10 years and that assuming I slept 8 hours per night, I would only be investing 10 cents per hour to sleep on it. Umm, yeah…right, whatever… (I bought a different one in a different store for $550).

People will pay more for terms and payment options.

3. A better guarantee. I know I have bought items that cost more than others for no other reason than peace of mind. I’m not alone, though. Offering a guarantee is a sure fire way to get more money out of consumers because people wonder if they’re making the best decision. A guarantee helps to remove that doubt and doubt has a cost.

Consider this: Social Security has an average return of 2 percent. United States Treasury bills have an average return of 4 percent. The stock market has seen average returns of 12 percent, yet people are willing to give up from 50 to 83 percent of their potential return on their retirement money for the assumed guarantee of Social Security.

People will pay more for peace of mind (even if it doesn’t make sense).

4. Consistency. Think Panera Bread, Orville Redenbacher, Starbucks, Tommy Hilfiger, McDonalds, Chili’s, Exxon Mobile, Honda, GE, Sherwin Williams, Samsonite, HP, Osmose, Coca Cola, Dockers. All of these are brands. All have competitors with almost the exact same products, yet you and I willingly pay more for products from a known brand because we know what we’re getting. Our experience with that brand assures us of a consistent product and we pay more for that consistency.

People will pay more for a branded product because they assume it has consistent quality.

5. Tradition. Switching is a pain in the neck. I bank at Regions Bank and have for over 36 years. I have five savings accounts (one regular, one Christmas Club, and one each for my three children), a checking account, a mortgage, a student loan (now paid off), a car loan (now paid off), and a credit card. Moving all these to another bank would be a pain because I have so many bills paid through automatic bank draft. One wrong move and I could get hit with late fees, so I put up with lower rates on my savings and a zero rate on checking (I’ll be changing this very soon though).

Another way tradition gets in the way is if you’ve always done something one way without being willing to change. If you’ve traditionally bought gasoline from Mr. Joe’s station just down from your house, you don’t want to experience the embarrassment of seeing him out somewhere and having to explain that you went to the BP station near work because it’s 2 cents cheaper.

People will pay more for traditions they like or don’t want to give up.

6. Customer service. I used to go to a certain oil change place because they would vacuum my car out and run it through their car wash “for free.” Come on. Who’s really paying for it? The extra $5 wasn’t because their oil was better or the service was faster. It was to pay someone for running a vacuum over my car’s interior and then put the car through the wash.

People will pay more for good customer service.

7. Quality. Why is it that “clinical strength” Secret deodorant is $8? Does anyone else think this is outrageous? Certainly not the women who swear by it. When you or I perceive (rightly or wrongly) that a product has a higher quality than another, we generally are willing to pay for that additional quality.

People will pay more for higher (perceived) quality.

8. The club. Certain “wholesale” clubs have popped up all over the country. They aren’t the most glamorous places to shop and they have somewhat inconvenient hours, but people flock to them. They charge a pretty hefty annual fee to be a member. One I know of charges $45 per year so you can avoid the 5 percent “upcharge” they assess on non member purchases. If I spend less than $900 per year there (and I’m pretty certain I do) then I’m getting hosed. The prices seem good, but since we have to buy cereal in 55 gallon drums, I’m not so sure…

People will pay more (even though it’s disguised) to be members of a club.

9. A perceived benefit. Many companies have instituted a loyalty program in hopes of getting repeat customers. I have tried to compete with one company that offered a loyalty program and found that customers and their spouses continued to buy from my competitor because “I’ve bought from them for two years and after another year of purchases, I’ll get a free trip to Hawaii.” One more time, who do you think is REALLY paying for that trip? Yet, my pricing was lower and my service was known to be much better. I’m guessing the customer saw it as a forced savings program.

People will pay more if they perceive a greater benefit to them.

10. Upscale appeal. Why some people are willing to pay $285 for a pair of $25 jeans is beyond me, but the appeal is very strong. There is a group of people who seek approval from others by appearing more successful. They reason, if I wear $285 jeans, everyone will think I can afford them. What’s the difference? There could possibly be some minor quality differences, but the biggest difference is the story behind the more expensive pair and how they appeal to their customer’s emotions and self esteem.

Sometimes the upscale appeal comes in the form of a celebrity endorsement. Plaster some B list celebrity on a product and it has instant credibility, instant appeal.

People will pay more for products with an upscale appeal.

11. Speed. People are in a constant hurry. Companies that offer faster service can and do charge a premium that people willingly pay. I have paid more for express shipping only to realize that UPS and FedEx seem to operate on a different calendar and clock than I do. To me three days is three days, but to them three days could mean five or as much as seven.

Who would you call if you had a toilet overflowing on Thanksgiving Day? Bill’s Discount Plumbing or Rapid Rooter (we’re there in 60 minutes or less). Dominoes Pizza became famous for their 30 minute guarantee. If your laptop was malfunctioning, would you take it to the shop that promised to have it fixed within the next two weeks or to the shop that charged more but would have it fixed in 48 hours?

People who are pressed for time or who are under a lot of stress will pay others to perform work that they themselves could do, but don’t have the time to do. I don’t have the time to change the oil in my car on most occasions, so I pay someone else. I don’t have time to do my travel plans, so I pay someone else to do it. I don’t have the time (or inclination) to teach my own children, so I pay someone else to do it.

People will pay more for speed and time savings.

12. Personalization. I have paid more for products that I was able to personalize. I’ve bought things for my wife and children that could have been purchased elsewhere for a discount but I paid more because I could have them personalized with their names on them.

“Personal” trainers command a premium over classes. Personal coaches command a premium over those coaching an entire team.

People will pay more for personalized products.

So what do we do? How do we conserve our money and keep from paying too much?

• Don’t fall for the need to have everything in your life be easy and convenient.
• Pay with cash as much as possible. Ask for a cash discount!
• Research the manufacturer’s guarantee and whether the product needs an additional warranty.
• Experiment with other brands to evaluate their consistency.
• Don’t let tradition get in the way of making a good financial decision.
• Decide the level of customer service you require and only pay for what you need.
• Evaluate the quality level of different products and decide what’s best for your situation.
• Make sure you aren’t joining a club just to have the card.
• Ask who is really paying for any perceived benefits. Are they really “free” or are they “included?”
• Don’t be fooled by the upscale appeal of a product. No one thinks you’re great because of your possessions.
• Slow down and plan your needs so that speed isn’t a factor in your decision.
• Learn to personalize things yourself. If you place a value on something being personalize, by all means, take advantage of it, but understand that you will pay more.

I hope you enjoyed this post. If you made it this far, you’re a trooper.

Can you think of any other reasons people pay more for a product or service? If so, please clue me in! I’d love to hear your opinion.

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