Monday, December 22, 2014

Price as Indica

Many things we evaluate on price.  Is this a good way to judge products?

A reader recently sent me a link to this book, which is a good read.  The first chapter discusses how pricing can affect buying decisions.   A jewelry store owner in Arizona can't move her turquoise jewelry to save her life.  In exasperation, she leave a note to her assistant to mark down all the pieces.  The assistant can't read her handwriting and doubles the prices instead.

All the pieces sell.

Is this an anomaly?   Not really.  It turns out that when people thought they were cheap jewelry they didn't want to buy.   But when they thought it was expensive jewelry they bought.   Price was their only indicia of quality.

In so many of our buying decisions every day in life, price is the only piece of data we have.  Whether it is a bottle of wine, a stock, or a head of cabbage, we can only judge quality by the dollar amount attached to the product.  Unless we are very educated about the product in question, we know nothing more.

Wine is a good example.  Unlike beer, which comes in five major brands (if we don't consider micro-brews, which fall along wine in pricing) wine has hundreds, nay thousands - nay tens of thousands of brands, wineries, types, regions, and even vintages.   How can you possibly know whether a particular brand and label and vintage is any good - unless you have tried it?

And how do you know to try it, if you don't know anything about it?

Price is one way many of us discriminate wines.  We assume that a more expensive bottle of wine is in higher demand - and thus will "taste better" than a lesser bottle of wine.   After all, if a cheap bottle of wine becomes popular, then the price will go up, right?

And to some extent, this is correct.   I was quite fond of "Gnarly Head" old vine zinfandel when it first came out.  Like most wine buyers, I was attracted by the label (label art and names being the other aspects that sell wine).  The word "Zinfandel" scared me off, with memories of sugary-sweet White Zins echoing in my head.  But the reverse label said it was a dry, robust red, and the price ($4.99) made it worth trying.

Well, it was a good wine.  Not something you are going to lay down in your cellar, but a decent serviceable table wine.   And apparently, a lot of other people noticed as well, and the price went up to $5.99 and then $6.99 and eventually to $8.99.

A similar thing happened to Phillips "Toasted Head" Chardonnay.   It started out as an obscure $6-a-bottle wine and eventually worked its way into the $16 bottle region (and then tapered off as people said, "Hey, it's nice, just not that nice!).

As you can see, I am a connoisseur of cheap wines.

The point is, when selecting a wine, unless you have had that brand, name, and vintage before, the only thing you have to go on are:

1. Brand Name
2. Label Art
3. General knowledge of type
4. Price

Guess what is the most common indicia that people use?   Price.   Because half the time, you've never heard of the vineyard, or the brand or whatever.

I ran into this the other day at the wholesale club.   Like the head of Bronco Winery, I see no reason why any wine should cost more than $11 a bottle.   I was looking through the $11-and-under section and saw a wine normally priced at $15 a bottle, with a neck tag for an instant $3 off.

And of course, I bought it.   Why?  Not because the wine was $12 a bottle - but that I though I was getting a "$15 bottle of wine" for $12.   In other words, I assumed the wine was better based on no other indicia than its list price.  And list price is a number made up by the winery.

It wasn't bad wine.   It wasn't bad marketing, either.

Or take the stock trading world.   Every stock trading website and every financial channel, page, or website, hypes stock price as the end-all to humanity.   Such-and-such stock is going up in price so it must be a good buy!   Meanwhile another stock is going down in price so it must be time to sell!

Of course, this is idiotic advice - buying high and selling low.   And yet stock price is all the financial pages - and even your financial adviser - talk about.   Good price means good stock, right?

But of course, there are other indicia that are far more powerful - but harder to find.  The company's plans, new products, stature in the marketplace, competition, changes in regulations, laws, labor strife - all affect stock value.   And P/E ratio, EPS, dividend rate, and the like all are arguably better indicia than stock price.

But most of the plebes buy on what?  Price.   The see a stock that is going up in price and think that it is like an escalator - "going up!!"  But of course, the best time to get on an escalator is at the ground floor not near the top floor - where there is nowhere further to go.

We use price to determine quality and value - when we have little else to compare.

There are of course, other indicia.

I was buying a wifi hotspot in WalMart the other day - the kind you can activate for a month and get WiFi over the G4 cellular networks.   WalMart sold several, and the prices of the units and the pricing plans were all over the place.  The technical specifications all seemed similar and were largely incomprehensible.

So which one did I buy?  The one that was nearly sold out.   There was a "hole" in the display where one brand seemed to be the one everyone was buying.   Rather than compare on price, I just picked the one that everyone else seemed to be buying.   It was an interesting gambit.   As it turned out, it was the cheapest one as well.

Price can cut both ways.   Sometimes, I have found that buying the cheapest product on the rack is the best buy.   For example, we were looking for a shade tent for our camper (we eventually installed an awning).  Prices ranged from a $49 tent, to a $99 shade tent, to a deluxe $199 tent with side curtains.   I picked the cheapest one and it worked out best.  The others were heavy and took up a lot of room.   As it turned out, he $49 tent was the best value as you could afford to throw it away after a  year or so.

The same is true for a number of purchases.  You go to a store and look a three items - one priced low, one medium, and one high.   Which is the best?    How do you tell?  For many of us, price alone is the sole indicia we use.

And often, this is the wrong answer.    We go to look at an item in a store and there are three brands, one cheap, one middle-priced, and one expensive.   Maybe the cheap one is too cheesy to consider - it looks like it will break in the store.  The middle brand seems nice, but the expensive one - is that better?   Sometimes yes, sometimes no.   Sometimes more expensive products are just more expensive for no reason - or a reason not related to the quality, such as exchange rates.  Sometimes they add "features" to a product (particularly electronics) which you may not need or want.   Sometimes the cheaper or middle-price unit is the best value.

Wal-Mart realizes this.  I have bought a number of electronics items (such as a GPS) there and discovered that the model I bought was a "Wal-Mart Only" model made specifically for Wal-Mart.   This is not necessarily a bad thing - the GPS I bought (with huge 7" screen) is great - but doesn't have the bluetooth connection that the non-Wal-Mart model would have had.   But then again, it was $50 cheaper.

If you can look beyond price, you can make a much better and more informed buying decision.   But how do you do this?   In years gone by, this was nearly impossible to do.   Today, we have the Internet - and no matter what you are buying, you can read and parse online reviews - and if you can see through the smokescreen of those, make a better decision.

But funny thing, these days, when confronted with two products and I can't make up my mind, I usually buy the cheaper of the two.   Why?  Because if I made the wrong choice, at least I risked less money.

1 comment:

  1. Note: Many wine shops and wineries are using rating indicia (like Wine Spectator - which is just one guy) to promote their wines. Funny thing is, every number you see is 90 and above. I presume anything under 80 is basically floor cleaner.

    So the neck tag saying "Wine Speculator rated 90 points!" isn't really helpful after all.


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