You Get (to Keep) What You (Don’t) Pay For

You’ve been Marketed!

Photo Credit: Keoni Cabral
Photo Credit: Keoni Cabral

The American consumer has been barraged by advertisements and commercial messages for years. These messages whether stated, subliminal or superliminal as well as peer pressure can cause the average consumer to deviate from the completely rational economic model consumer, homo economicus, of high school economics.

Marketing agencies earn millions of dollars crafting enticing ways to encourage people to spend money on almost every product or service under the sun. Product placement in movies and television is rampant. It would be nearly impossible to completely ignore the deafening chorus of messages compelling people to “buy! buy! buy!”

Companies spend millions, even billions of dollars convincing us that we need to buy X to be happy/cool/attractive/thin/intelligent. That marketing cost is built into the products that we then consume, even when identical or closely-related products exist at a fraction of the retail price.

It’s often been said that you get what you pay for. So much has this become ingrained in our minds that we often take the reverse statement to also be true: “you pay more, therefore you get more,” which is patently not true.

First, a couple examples: Two different labels of the gallons of milk in your store are produced in the same plant even though one might cost an extra dollar or more. The only difference is the label affixed to the front. It the fancier label worth the extra dollar? Does it add to the pleasure of the cookie dunking experience? Similar examples can be found in fine wines and even peanut butter and jelly sandwiches. We tend to assume that a costlier product has more intrinsic value without being able to objectively quantify any difference in quality of the good or service.

A recent Freakonomics podcast cited a surprising statistic: over 90% of pharmacists buy generic drugs when they are available. If specialists in the field whose job it is to know about drug chemistry, biology and safety overwhelmingly choose the  generic that is chemically equivalent to the name brand and significantly less expensive, why don’t more people do it? Mostly it’s because parents don’t want to feel that they’re “cheaping out” on their kids health, when in fact, the name brand and the generic are chemically the same. People are willing to pay a premium to feel better about spending money on their kids’ health.

Another prime example of marketing can be seen in evaluating different types of mutual funds. Some charge a fee of 1% or even 2% or more of the total assets each year to run a portfolio that over 75% of the time doesn’t beat the S&P 500 index in a given year. Taken over several years that chance drops even further to just over 10% in 5 years. Outperforming funds in a given year generally do not repeat that performance the following year.

Does paying more guarantee you get more? Hardly ever. Vanguard and Fidelity are well-known in the investment community for their  low-cost index funds. Index funds are funds that don’t try to beat the index, rather they just track it (minus a low expense ratio). These index funds tend to outperform more expensive and over-hyped actively managed funds. Their out-performance of active funds tends to increase as the comparison time increases.

Someone who makes a round-trip fallacy–thinking paying more gets more would be out not only that extra fee, but at retirement would be out also the extra appreciation that was taken out every year due to fees. Over twenty, thirty or forty years, that is a huge pile of missed appreciation.

Just as an example, assuming two otherwise equivalent funds with one having an expense ratio of 1% more, both returning 7% annually (before expenses), $25,000 annual contributions over 25 years, the lower cost fund would be worth $1.58 million vs. $1.37 million for the more expensive fund. That’s over $200,000 difference of missed dollars in an investment account. It would take nearly another two years at the higher fee annual return rate (6%), while still contributing $25 grand a year to surpass the $1.58 million mark! That’s a lot of time to pass over a simple 1% difference. Now all those dollars didn’t go to the manager or broker, most are actually the result of the lost compounding year after year.

While the phrase “you get what you pay for” is often still valid, it is not a universal axiom that paying more for something equates to a superior product or service. So how can we distinguish truth from fiction or, said another way, can we separate meaning from marketing?

Emotional vs. Logical Reasoning

Hype is a four letter word that sums up the emotional message to which marketing often appeals. There aren’t regular appeals to logic and reason in your typical 30 second ad spot. Numbers and logic aren’t exciting, sexy or good for selling things that you don’t really need, but having you imagine yourself at the beach surrounded by young attractive people, doing fun things sells a whole lot of fizzy beverages.

Humans are emotional creatures. When confronted with challenging situations, we rarely take the time to reason out the pros and cons and instead follow our gut instinct. We are often short-sighted, thinking only about what we want now instead of what we will want in the future.

Overcoming the emotional, childish brain is a learned behavior that takes time and lots of will power to say no more than once. This is especially important on big ticket items like cars, houses, many big electronics, furniture, appliances, etc. Some tips for being more Spock-like in your reasoning:

  1. Take time to look objectively at what you are desiring to purchase and ask the hard question why you are really wanting it? Is it a want, a need or a passing interest?
  2. Make a list of the pros and cons of making a significant purchase. Does it put me in a better or worse situation?
  3. Ask if I want to spend $100 on this widget, if someone offered me either $100 or this widget, which would I pick?
  4. Sleep on a decision before pulling the trigger on a big purchase to allow the impulse to buy die down.
  5. Compare similar options/brands. Am I getting the best value for what I need? Look at the specs, not the glossy marketing flier.
  6. Make a list of requirements and desirements for big ticket purchases, i.e. for a car, I need 5 seats and a fuel economy of x miles per gallon, but I’d really like heated seats and a backup camera. Put a value on your desirements before actively shopping and stick to your guns.
  7. Consider the total cost of owning the doohickey. How often does it need to be maintained or repaired. How long will it last under warranty and how long do I expect it to last? Could I sell it when I’m done with it?
  8. Once a decision to purchase the item is made, look for ideal times to purchase if the purchase can be delayed for a time. Buying seasonal items near the end of the intended use season can often save you half the cost and is still almost new when the 2nd season comes around.
  9. If you determined to make a large purchase, write down somewhere how you expect to feel a day, a week and a month later. Circle back at those times to see if your expectations were met.
  10. Set short, medium and long term financial goals which help refocus on saving and not spending.

 

Photo Credit: Dheepak Ra

Photo Credit: Dheepak Ra

The above questions need not be used in every single decision, but if you find yourself easily swayed by advertisements, keeping up with the Jones’s or Smiths or whomever, these questions might help evaluate purchase decisions more objectively and also aid in curbing those buy-it-now impulses that drain your wallet.

Reducing your exposure to the constant barrage of advertisements and sales pitches will also do wonders for your pocket book. Several years ago while watching a live TV production that went to commercial my young daughter asked in disappointment, “What is this? What happened to the show?” It hadn’t occurred to us that through the magic of commercial free media like Netflix, Amazon Video and others, our children hadn’t seen a commercial in a very long time. They also hadn’t continuously pestered us for the latest and newest toys, foods, clothes or Mercedes Benz that are featured prominently in television advertising. Bonus parent points!

As we looked at our media consumption further, we found that we often listed to podcasts, audio books, Spotify or commercial-free radio in the car. Our children weren’t getting the U.S. Marketing Association’s recommended daily dose of advertising messages pounded into their skulls and yet, they were somehow oblivious to the fact that they didn’t have the latest American Girl doll or action figure set, and yet, by all accounts, they were still happy. Please don’t rat me out to the advert police, but living in a world with less advertising is great.

While completely filtering out the marketing machine can be an impossible task, with internet, school, work, billboards, etc, but learning self-restraint is so much easier when there’s less to fight off. Building self-control when young is especially powerful when it comes to controlling spending and pays off in the long run.

That’s not to say the emotions are meaningless, only that we as humans are susceptible to well-crafted marketing ploys and it will serve us  and our wallets well to evaluate the underlying reasons we buy things to ensure they are consistent with our true values.

Rightirement

Mr. Rightirement has a long standing interest in personal finance, saving his allowance as a child for college and retirement.
When not studying personal finance, he loves spending time outside biking, hiking and camping. He is married with 4 children. He currently works as an engineer.

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