Friday, April 15, 2011

The Cash Store (a hypothetical)

Suppose there was a store that took only cash for goods and had absolutely no gimmicks whatsoever?  They would be out of business in days!


Suppose you could go to a store to buy all your daily needs, and pay cash.  No coupons, no frequent buyer clubs, no membership cards, no sales, no discounts, no rebates, no cash-back, no... well nothing.

No gimmicks, just good quality goods at reasonable prices.

The basic financial transaction - they give you a good, you give them cash.  End of story.

And without all those gimmicks - even taking credit cards (which add 2% to the merchant's cost basis) the merchant could offer the lowest, rock-bottom prices.

Right?

I mean, such a scenario would make sense, wouldn't it?

But it would go out of business in a matter of days.  And here's why.

You see, people are basically idiots.  And yes, that includes you and me.  We see a sign that says "SALE!  50% OFF!" and we really think that there are goods being offered at 50% of their market value.

But of course, they are not - they are just marking down a nominal "retail price" by an arbitrary amount.

If the goods really were for sale at 50% off, a competitor would come in and buy them all up and then re-sell them in his store for full market value.  That is simple logic and simple economics.

You see, we are idiots, because we are continually sucked into these sort of gimmicks - the idea that we can get something-for-nothing.  We actually believe, for example, that the car dealer is selling cars at a lower price on "President's Day Weekend!" and that for some reason, the cost an automobile magically increases the day after.

Yes, for sure, they will tell you this, to get you to sign on the dotted line without thinking about the transaction or cross-shopping on price.  And yes, this has been going on for decades - Centuries, eons.  Human nature is what it is.  And we are all suckers for the Carnival Barker, the Ad Man, the Con Artists, the Scammer.

And so, every economic transaction we make becomes unnecessarily complicated.  I go to buy a hard drive for my computer - because I need one.  They have three to choose from, and one is "marked down" by $20, so I delude myself into thinking it is a "bargain" when in fact I am just being steered toward the purchase by some marketing guy behind a computer screen five States away.

And then I go to check out, and I hand over my "shopper loyalty card" which supposedly gives me bonus points or something, but I never seem to get any tangible reward out of them.  And of course, I pay by credit card, which costs the merchant 2% of the sale, but the merchant doesn't mind, because they can mark up the product by that much without me noticing - and they know I will spend more money if I use plastic, instead of cash.

And of course, if I had a "rewards" card, I might be making a decision on which card to use based on some kick-back scheme like frequent flyer miles.

And if I don't pay the balance on the card, of course, I end up financing the purchase over months, if not years, at an interest rate as high as 25%.

So a simple transaction - I give you dollar bills, you give me product - is elevated to a higher level of complexity by a factor of five or so.

This is the basic nature of consumer retailing - taking a simple economic transaction and making it complex.  And the reason they do this is to get you to think emotionally about purchases, not logically.  In fact, you are inclined to think emotionally, all they are doing is taking advantage of it.

Purchasing products wholesale (real wholesale, not faked-up "wholesale outlets" that deceive consumers into thinking they are getting "bargains") is often a different animal.  That comes a lot closer to the "you-give-me-product-I-give-you-cash" basic transaction.  But in most instances, wholesale prices and wholesale transactions are not offered to the consumer.  Since the margins are much thinner in such transactions, wholesalers insist on larger quantity purchases and also don't want to deal with the emotional issues that consumers have about a purchase.

Buying used items from an individual is about as close as the average consumer can come to the coveted "basic transaction".  You neighbor is selling a car.  You agree on a price, you hand him a wad of $100 bills, he signs over the title.  Simple as that.  And it is one reason why a late-model used car from an individual is such a deal - no hassles, no rebates, no sales, no bullshit, no nothing.

And yet, most people do not seek out such deals.  They instead listen to the siren sound of the new car dealer, with the flashy signs that say "SALE!"  and "REBATE!" and then wonder why their financial ship founders on the rocks.

We are drawn toward gimmicks - toward these schemes and faux financial acumen.  We collect S&H Greenstamps and think we are being smart, instead of shopping on price.  We clip coupons, join frequent shopping clubs for 5 cents off on a gallon of gas.  We do everything, it seems, except balance our checkbooks and consider the value of the underlying bargain.

And of course, this is why retailers like to obscure simple transactions with a lot of meaningless window dressing - to distract you from the underlying bargain.

And our human nature to be drawn to such schemes is why they do it - and why my hypothetical "cash store" does not exist, and if it did exist, would go bankrupt in a matter of days.

There is no answer, of course, to this problem.  The great unwashed masses of humanity fall for these scemes, scams, and cons, so the bulk of retailers cater to these types of deals.  You can't go to a car dealer and "get a good deal" on a new car by definition.  Why should they bother?  As one car salesman explained it to me (in a moment of candor) "Some other idiot will come along shortly and pay me far over sticker price for this car, so why should I sell it to you for a reasonable price?"

The only thing I try to do is to:

1.  Simplify my finances and my life:  I try to avoid schemes and gimmicks that give me reward points or whatever, and instead try to concentrate on getting the best deal and the best price.

2.  Walk away from entire sectors of the marketplace that cater exclusively to emotional thinkers - this means car dealers, electronics stores, and other vanity retailers selling things you don't really need, but rather want, for status reasons.

3.  Buy what I need, not what I want - by avoiding "shopping" for bargains, but instead figuring out what I need first, and then researching and making a rational buying decision based on the best quality and price.

But of course, the marketing people don't want to let you do these things.  The marketplace is thus a battleground, and you have to fight, on a daily basis, to see through the fog of war to understand what is really going on and where the real bargains are - as opposed to the faux ones.

Alas, the cash store will never exist.  We will have to fight for bargains every day of our life.  The marketplace is a battleground.

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