Sunday, May 16, 2010

How much is it worth?

When we are considering a purchase, we often look at the pricetag on the product or service and ask ourselves, 'Is it worth that much?' We may even ask the salesman, 'What do you think about it?' What we are really trying to gage is the value inherent in the product or service and whether or not it justifies the proposed price. Ideally, of course, the price should reflect all the attributes of the product or service in order to give us an object measure of its worth. However, we still find ourselves questioning the price. Why do we do this? Because the question we are asking isn't really, 'How much is it worth?' Rather, the question we are asking is, 'How much is it worth to me?'

All of us have a different measure for the value of any given product or service because each of us differ in the factors that determine value. We all differ in 1) our inclinations and 2) our financial ability to satisfy them. Therefore, the equation that determines the true worth of any given product or service for any given person is:

Value=Purchasing Power+Personal Preference

It doesn't get much simpler than that. If price were to truly reflect the worth of a purchase, everyone would have to have the same desires and the same amount of money.

First, the amount of money a person has to cover the proposed price significantly affects whether or not the product or service is worth that much to that person. Generally, as a person's income increases, the worth of any given product or service to that person also increases. Worth and income, therefore, are positively correlated. Let's give an example of how purchasing power plays into a purchasing decision: There are 2 people purchasing vehicles. Both would settle for a 2010 Honda Civic EX, priced at $20k, but would prefer a 2010 BMW 750, priced at $80k. Person A makes $20k per year and Person B makes $80k per year. Below is how each makes his purchasing decision:

Person A: $20k/yr => BMW is $80k (4 yrs) => Honda is $20k (1 yr) => settles for Honda

Person B: $80k/yr => BMW is $80k (1 yr) => Honda is $20k (3 mos) => buys BMW

Why does each person make a different decision, given that the prices and preferences are identical? Because, clearly, Person B has greater purchasing power than Person A. It takes Person A four times as long to be able to afford the BMW than Person B. As a matter of fact, both Person A and Person B value their vehicles at one year's worth of labor. Thus, as absurd as it may sound, one could say that the Honda is worth just as much as the BMW...because the Honda is worth just as much to person A as the BMW is to person B.
Let's change the scenario a bit and look at it from the perspective of personal preferences. Suppose, again, that Person A and Person B both prefer BMWs to Hondas, but one thing changes in the outcome. The purchasing decisions are as follows:

Person A: $20k/yr=> BMW is $80k (4yrs)=> Honda is $20k(1yr)=> Buys BMW

Person B: $80k/yr=> BMW is $80k (1yr)=> Honda is $20k(3mos)=> Buys BMW

In this scenario, Person A buys the BMW regardless of the cost because Person A prefers BMWs that much more than was the case in the first scenario. Thus, in this scenario, though both Person A and B are making the same purchase, the purchase is worth four times as much to Person A as it is to Person B. The BMWs, in this case, have different worths.

The point of this exercise is demonstrate that neither Hondas or BMWs have inherent value. Ipods are worth no more than Walkmans. Starbucks is no better than Folgers. In fact, terms such as 'value,' 'worth,' and 'better' are meaningless without being applied to some subject. Nothing has intrinsic value. A thing only has value if it is valued by someone; it only has worth if it is worth something to someone. Things that are objectively valuable are simply valued by a lot of people or exceptionally valued by a few. Things are worth whatever we want them to be worth.

Saturday, May 1, 2010

Resisting Sales Resistance

Buyers with high 'sales resistance' have often prided themselves on their ability to staunchly turn down an offer, no matter how lucrative it appears. They are not convinced by the cunning of the salesman and cannot be swindled into making a purchase through the gimmicks employed by marketers. They put up a wall between themselves and sellers..and they assume such a barrier to be representative of strong character.

Perhaps sales resistance can be beneficial and there may have even been a time when it was generally necessary. Today, however, sales resistance has achieved a certain level of ubiquity in human psychology. The moment we feel we are being sold something, we put up our wall. It is no longer a resolute choice to refuse an offer but rather an instictual reaction. Someone calls on our phone or knocks on our door and the moment we recognize the sales pitch, we have already spoken a resounding 'no' in our minds. We are offered additional merchandise at the check-out lanes and immediately suspect ulterior motives. Why are they selling me this stuff? Are they just trying to get rid of it? What's wrong with it? Today, we never have to give a second thought to turning an offer down.

But what if the offer is beneficial to us? What if it's a good deal? Could it be possible that, in some situations, sales resistance is a bad thing? I think so. Today, when skepticism is so engrained into our purchasing mentality, we need to think not so much of sales resistance as we do of sales acquiescence. We need to force ourselves to consider offers that may benefit us. Companies today are going out of their way to appease skeptical consumers. The market is awash with product samples, demonstrations, free trials, etc. Sometimes, it would not hurt us as consumers to say, "yes."

The obvious question we must ask ourselves is when to be sales resistant and when to be sales acquiescent. The answer, I believe, lies in the way we make decisions. Our initial reaction to an offer is always emotional. By default, we are emotional decision-makers. The second-thoughts are those of rational decision-making. The question when making a purchase of a product or service should not be, 'How do I feel about it at the moment?' Rather, the question should be, "How will I likely feel about it through the duration of its use to me?' The reason why we are instinctually sales-resistant is because the stigmatization of selling resonates with our emotions the moment we recognize it. Our immediate response is that we are being taken advantage of. On the other hand, there are times we find a sale irresistible. Again, something about the product or service has struck on emotional chord that causes the gut reaction of, in this case, making the purchase.

What we need to do as consumers is become rational decision-makers. Of course, we cannot make a truly rational decision because we cannot really know how much the product or service will end up benefiting us. However, we can always think twice. We can always question our gut instinct. That questioning is where emotional decision-making becomes rational decision-making. Of course, sellers would rather buyers be emotional decision-makers if they can find the right 'buy-buttons.' An impulse sale is a lot easier and less costly to make. (This is the same thing as buyers preferring sellers to offer the lowest possible price in fear of buyers not paying the higher price that they are, in actuality, willing to pay). However, making rational purchasing decisions keeps the sellers honest and improves the quality of products and services.