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What Makes A Good Deal Good?

Do you like getting a good deal on clothes? How about food? What does it even mean to get a good deal? Does it mean you get 20 percent off of whatever you're buying? How about 50 percent? What about 90 percent?

I'm going to argue against almost everyone I know, financial advisers, finance writers and bloggers. A good deal is about more than just money. In fact, I'd go so far as to say, in many cases, money is the secondary factor in getting a good deal.

I'll argue that it's mostly about the value you receive from whatever it is you're buying, with the price being a reflection of that value. The price of whatever you buy is the price it's selling for. It's a good deal when you perceive the value as worth paying for at that price. In other words, it's not strictly about price, and it cannot be strictly about value. There is no dichotomy here. It's about value and price. I don't think the two can be separated and your job, as a consumer, is merely to recognize this.

I have a difficult time understanding most people's arguments that something is overpriced or under-priced when it's devoid of context. A "cheap" wallet might sell for $5. The cheapness is two fold. First, the price is cheap, but the quality is also likely poor. Here, context matters. Who cares if you got a cheap wallet if it's made of cardboard? Is that really a good deal? I don't think so. A real leather wallet selling for $5 is a different story. It's probably stolen, but it's a different story all the same. If it isn't (stolen), I'd say it represents a fantastic deal.

Now, think about what this means in various contexts. When you go grocery shopping, do you shop for the cheapest groceries, trying to use all of the coupons you clip out of the paper? Do you fill up on Ramen noodles and Twinkies? Or, do you go for the high value food items regardless of whether you have a coupon for them? You can go cheap on your food, but the consequence is poor health years later. Then, buying those groceries will cost you much more money in medical bills, trips to the doctor and time off of work. If you can get high quality food and you have coupons for them, all the better.

When you buy a car, do you immediately go for the cheapest vehicle on the lot or do you get what you want? The cheapest car may leave you stranded three months from now with a busted CV joint or a dead alternator.

At this point, I want to stress something which I think is important: when I say "want", I mean "want" in the context of all of your budget and of all of your values. Some people miss this part of my argument and assume I that I mean want devoid of context. They end up saying something like: "Well Dave, I want a Ferrari, but I can't afford it. But, you're telling me to pursue what I want". Yes, of course I think you should get what you want, but you must consider your finances. Saying you want something without considering how or if you can pay for it is utterly ridiculous and irrational. Buying something on sale because it's on sale is just as irrational. Focus on value and price.

Finally, I think there is something to be said about what I would consider "common sense." What I mean is, when you encounter a deal which appears to be too good to be true, it probably is. Not because good deals are inherently bad, but because valuable goods and services aren't cheap.

There's an old saying which goes "you get what you pay for" and I think there is some truth to that. Businesses don't always give you a good value for your money, but they almost never give away amazing value for no money or a perpetually discounted price (unless they're going out of business or changing product lines).

In a way, it would be a contradiction to do that. If the product or service in question were so valuable, why would a business be giving it away at a ridiculously low price (or worse--for free)? And, if they simply didn't recognize the value of their product or service, they wouldn't be in business selling what they're selling. Finally, businesses don't and cannot operate at a loss. Something has to give: price or quality (or value).

That's not to say that all discounts or "good deals" should be viewed with suspicion. Many businesses use what are called "loss leaders." It's a sales strategy where something of high quality is sold below its cost to produce or given away, causing the business to lose money. The expectation is that it will generate repeat business and the repeat business will make up for the initial loss. Some businesses will even adjust their regular retail pricing to compensate for the loss leaders (RE: the retail prices are higher than they otherwise would be without the initial good deal). 

So, in summary, I think your primary focus should be on pursuing values and not ignore the price relative to the value of what you're buying.

I've personally adopted this approach in my own life and it has worked out well. I don't feel as though I overpay for what I buy (unless I find out after the fact that the merchant lied or deceived me in some way), and I don't make sacrifices or compromise on what I really want. In many cases, it's also emphasized the fact that I can only pursue so many values in life before I would otherwise run out of money. The ultimate result is, what I would consider, a rich life.

What say you, good and faithful readers?

This entry was posted on June 17th, 2011 by David C Lewis, RFC. Edits may have been made to keep this entry current. · 1 Comment · Philosophy In Financial Planning

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