Thursday, February 23, 2012

You Don't Always Get What You Pay For

"You get what you pay for" is a maxim used by many people.

If only it were 100% true.  Like other types of conventional wisdom, it is not.  Frequently, the cost of an item has nothing to do with its actual value.  It just makes us feel better to believe that if we spend more to buy this shiny new gadget as opposed to that other, less costly one, then we are getting more value.

Take apples.  Not organic apples, just normal apples (the price of organics is a complicated analysis we will save for another day).  I can go to Wal Mart and buy them for a much cheaper cost than I can if I go to Heinen's.  The price difference can be significant, but Heinen's apples aren't somehow better than those grown by farmers who sell to Wal Mart.  The laws of biology and chemistry don't become 30% more complicated and expensive for Heinen's producing farmers.  My body is going to utilize both apples the same way if I eat them.  So what's the difference in cost?  Service.  Presumably the workers at Heinen's are paid better, receive livable wages, and the shopping experience is more luxurious.

Often the perceived value of an item raises its cost, but its utility is unaffected.  Studies have shown that only the most discerning of palates can tell the difference between wine that is more than $25 per bottle.  So this means I could spend $25 or $10,000 for a bottle of wine and receive almost the same utility value--both are going to give me a buzz and taste good, but one is a fraction of the price of the other.  Much of this then becomes about perception.  My grandfather used to be a barber.  There was an Italian man who frequently came into his barbershop and said how he could tell the differences between good and bad wine because he had grown up drinking all sorts of different wine.  So my grandfather decided to test the man's claim.  He took an expensive bottle of wine and drank it.  So far, so good for my grandfather.  He saved the bottle.  Then he took a cheaper bottle of wine and poured it into the empty expensive bottle and resealed it.  He gave the Italian man the bottle of the "expensive" wine and told him to come back and give him a review.  Lo and behold, the man happily returned a few weeks later and said "The wine was amazing, very fine and delicate tasting!"  My grandfather smiled and nodded, knowing better.

The same goes for other items, especially fashion.  Highly fashionable clothes are supposed to cost more because of the perceived value of the designer's vision.  These same clothes are frequently made in sweatshops in Asia at a tiny per-unit cost.  Quality varies to some degree, but overall, the perceived value of a dress by Vera Wang as opposed to some other unknown designer is higher, so apparently you are supposed to believe you are getting something of higher quality.  But many times, you are not.  What if an unknown designer happens to create a dress you like better, or looks better on you?  What if you don't value Vera Wang designs any more than you do of "lesser" designers.  Either way, the clothes are going to serve their utility function the same--they keep you covered.  Or if you buy a Vera Wang dress used at Goodwill, does it suddenly become worth much less?  What if it was never worn and has the tags on it?  If you pay $5 instead of $5000, are you still "getting what you pay for?"

Just because something costs more, doesn't make it better.  Yet this fallacy is something that many people hold.  Take photography.  There are photographers who charge very high prices and do shoddy work.  Even when their photos are put up against those of "cheaper" photographers, their work doesn't hold up.  Yet there are some clients who won't go with a photographer if their prices are "too low" because "they must not be as good."  What if the lower priced photographer charges less because they don't care as much about money and would rather work in volume?  What if photography isn't their main profession so they don't care about charging a great deal?  The true worth of something comes not from its price, but its value.

Oxygen is more important than cigarette smoke.  Without oxygen, we die.  Cigarette smoking costs $6.78 per pack and kills you.  If "you get what you pay for" is true, then rich people would be better off trading cigarette smoke for oxygen, right?

Let's get back to cameras.  If I have a big budget to spend on acquiring a new digital camera (we are indeed dreaming), I have many choices.  The Nikon D3x currently costs $7000 and has 24 megapixels.  But if I wait a month, I can buy the Nikon D800, which is going to have 36 megapixels, 1080p video, and other features for $3000.  So just by waiting one month, I can save almost half the amount of money and get something much better and that has more functionality.

Using price as the most important benchmark for quality is the lazy person's way out.  The better choice is to analyze an item based on what value it has for you, and how the price reflects that worth.  It means more work, but sometimes the results can be priceless.

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