My wife and I recently were discussing two of our favorite ideas over coffee: value (which we think of as getting more than you paid for), and the contrary idea that you do, in fact, get what you pay for. Being frugal, we are naturally drawn towards value because we love the idea of getting more than a dollar's worth for our dollar. But it's clear to me that we have a bias. We overvalue the value, per se. And we have a lot of examples of the opposite thing being true. I buy the inexpensive drill bit and, yes, it breaks. The brand name drill, however, is still running after 15 years with no signs of slowing down.
I think I am drawn to each idea for different reasons. I like the concept of getting what you pay for, because it's an absolute: I am drawn to the principle of a relationship between price and worth. And value is an attractive idea for the opposite reason: because if a price has no necessary relationship with an item's worth, then there is a way to optimize. I can make purchases that hit a sweet spot between price and worth, and it's a variable concept: I also get to decide how well I did.
So, for some Friday fun, let's do a quick breakdown.
The Logic of Getting What You Pay For
I am drawn to the idea that you get what you pay for, for the same reason that I like the idea of efficient markets. Just as a stock price at all times reflects all publicly available knowledge about a company, at this moment and tomorrow and a year from now, so too does the price of a consumer good more or less reflect its true worth. It's like a grand unifying theory of consumer economics.
Manufacturers & distributors try to extract maximum profits, consumers simultaneously exert downward pressure on prices, and the number at which these groups meet is the right price. Any variations are random. So I know this jar of Classico pasta sauce really should cost $3.50 and this jar of Ragu should cost $1.75 because it's exactly half as good. I can spend twice as much, and get twice as good a pasta sauce. Or I can deal with a sauce that's only half as good, but I get to keep half my money. There is no wrong decision. I can't mess up, and the only real decision I have to make is how much money I want to spend and how tasty a dinner I want to eat.
The grand theory runs into a jam, though, when the store across the way starts selling Classico for $2.50 and Ragu for $2.00. Not only is the true price for each jar now in question, but so is the ratio between the two. At this second store, all of a sudden Ragu is half as good but only 20% less, and no one should ever buy it. Realizing that consumer markets can't be completely efficient, if they ever were, I now have to start considering the idea of value.
The Allure of Value
There is a part of me that loves the idea of value, too, because it gives me more power as a consumer. I can be strategic in my purchases and get more for my money than I did yesterday, or more than my neighbor does tomorrow. The concept of getting more than you paid for opens our spending habits into a bit of a competition. I can track my purchases and learn that Classico usually sells for $3.50, wait for a sale, and then buy in bulk when it sells for $2.50. That creates value, and that's a good purchase...right?
The rub is that value only exists in relative terms. $2.50 a jar is a good deal in comparison to the $3.50 it was selling for last week. So, $2.50/jar = value. But what happens if the price goes down to $1.99 next week? Did I no longer get a good deal last Friday?
And what about knock-off brands, that claim to be as good as the original? If the Safeway sauce is 30% less than the Classico, should I buy it? There's a part of me that knows that it probably isn't going to be quite as good as the brand name but, how much worse? Despite my letters, Safeway still refuses to put clarifying labels on their products as I suggested: "Only 10% crappier, but 30% cheaper than Classico!"
If getting what you paid for is the completely rational and organized world of the US military, where prices and goods march perfectly in lockstep, then the concept of value is a smoke filled pup tent at Burning Man, where prices are, like, whatever you think they should be, brother. If I am high and hungry and I think a jar of Classico is worth $6, and someone is willing to sell it to me for $5 or trade it to me for my five dollar flip flops, then hey, I got a good deal! I got good value because the price was less than I thought the thing was worth, right?
I go back and forth on these ideas, because I often find myself cherry picking the ethos that suits my mood at the moment. Yesterday when I bought the deli ham on sale for $4 a pound instead of the Boar's Head at $9 a pound, I justified buying the cheaper item because I believe it presented value. But when I bought the wild Sockeye salmon for $8 a pound instead of the farm raised salmon for $5 a pound, I told myself that I was buying quality, and you get what you pay for.
In reading this post over, the only thing I'm really sure of is that I have a hankering for pasta. I'm not sure either idea works well as a grand unifying theory, but I do find the application of the ideas to be entirely too confusing to consistently know what the price of a thing ought to be.
What say you, readers? Are prices what they should be? Or is the value in the eye of the consumer?
*Photo is from InAweofGod'sCreation at Flickr Creative Commons.