Why Using Prices in Buying Decisions Often Misleads Shoppers
A product’s cost per use is less intuitive but more useful & can save money.
Posted March 7, 2016
It leads consumers to buy products that are on sale (how thrilling it is to buy a cashmere sweater or wool slacks marked down to $49 from its regular price of $350!) or to hone in on the cheapest of the available options.
But focusing on price alone, even if it’s a sale price or a really low price, can seduce consumers into buying products they don’t need or ones that are not the most economical in the long run. This is because price paid for a product is often uncorrelated with its cost per use.
How often the product will be used and how long it will last are equally, if not more, important factors that consumers should consider in their buying decision.
Which socks will you buy?
Consider the following example about buying socks. Let’s say you have gone to a department store to buy socks and come across two choices. The first option is a pair of very high-quality socks with thick cotton, reinforced heels and toes, and sturdy backstitching. A single pair costs an exorbitant $20. The second option is a five-pack of brand name socks that are of a lower quality. But the pack costs only $20, or $4 per pair. Which socks will you buy?
At first glance, shelling out five times as much for a pair of socks seems wasteful. So if you are like most people, you will find the cheaper option compelling and buy the five-pack.
But now consider the socks’ life. Because of its thicker material, reinforced sections, and better stitching, the $20 pair can be worn and washed about 200 times before it wears out. The $4 pair can only be used 20 times before it becomes holey. When we consider their lifespans, the economics of buying socks change completely.
The math indicates that the $20 pair actually costs only 10 cents per use while the cheaper $4 pair costs 20 cents for each use.
On a per-use basis, the pair of socks priced five times more actually costs half as much as the cheaper five-pack.
Total Cost of Ownership
Even if most consumers don’t think in these terms, organizations are adept at looking beyond prices in their buying decisions. When making significant purchases such as new robotic machines for an assembly line, a drill rig to extract oil, or enterprise software to manage customer data, businesses pay limited attention to the product’s price. Instead, they consider a metric known as the Total Cost of Ownership (TCO). TCO provides the buyer with information regarding how much the new purchase will cost to use over its entire life. It includes not only the purchase price but also the costs of learning to use the product, labor costs of operation, maintenance and downtime costs, and the costs of its ultimate disposition. In many cases, the product’s initial price is a small fraction of its TCO. And products with high initial prices often have much lower TCO than those that are cheaper to buy. Thus, a machine that is faster or one requiring less labor to operate has a much lower TCO even if it has a much higher listed price. The cost per use calculation is a variation of TCO applied to consumer purchases.
How Cost per Use Affects Consumers’ Buying Decisions
The cost per use concept applies to durable products that are used repeatedly (everything from shoes and clothes to kitchen utensils and accessories, from furniture to electronic appliances and even to major purchases like cars and houses) and subscription services like gym memberships or cellphone service. It does not apply to consumables like food or batteries where per unit prices are easy to find. Nor does the concept apply to services such as restaurant meals or airline tickets where consumers pay separately for each “use.”
How does considering cost per use instead of price affect the buying decision? Here are four specific ways.
- Greater weight of quality over price. Cost per use favors buying products with better quality, even if they are pricier. And here, quality refers to actual functional aspects that impact product life and aesthetic aspects that affect how often it will be used. For furniture, quality implies sturdiness of materials, which increase its durability and life. And it also implies the comfort of a couch or chair. For a pair of shoes, quality of the sole’s materials, the leather’s finish, and so on, are all relevant. For every product, better quality lowers cost per use. Promotions and sales are less influential in the buying decision.
- Importance of the product’s upkeep. As consumers, we pay a lot of attention to decisions about buying new things. But we hardly give any heed to maintaining things we already own to ensure their longevity and smooth functioning. This is usually something as simple as cleaning a vacuum cleaner or coffee machine regularly, or fixing a leaky faucet. Or it could be deciding to repair an appliance instead of recycling it and buying a new one. Once we look beyond price to cost per use, upkeep becomes important because it helps drive down cost per use.
- Using the product for its entire life. In another blog post, I wrote that Americans spend close to $2,000 on shoes. One interesting statistic I found when writing that post was that even though American consumers own an average of 14 pairs of shoes, they only wear 3-4 pairs regularly. The rest are simply never used. The upshot is clear. In addition to maintenance, the other key to lowering the cost per use of any possession is to use it regularly until it wears out. Planned obsolescence notwithstanding, very few people use products to the very end of their lives. More than half of iPhone owners, for example, upgrade to a new model as soon as their service provider allows it, every two years. This is far too soon; the lifespan of an iPhone is five years or more.
- Reigning in the variety seeking impulse. One reason for owning 14 pairs of shoes is that we crave variety. Even if we wear the same 3 or 4 pairs of shoes, we like the option of having other choices. Plus buying shoes is a fun thing to do, and many shoppers like to collect them. On the flip side, the tendency to seek variety and own many versions of any product, whether it is shoes, smartphones, or cast iron skillets, is the quickest way to increase cost per use. Reigning in this impulse and owning fewer versions is a sure-fire way not only to derive maximum use from each item but also to save substantial amounts of money.
When considering a purchase, thinking about the product’s cost per use will help consumers make better buying decisions. Considering cost per use shifts our attention towards enjoying things we already own instead of constantly buying new things. When we do decide to buy something, lowering cost per use means finding high-quality, long-lasting items, and using them for their entire working lives. Simply put, it means extracting every scrap of value from our possessions. Not only is this good for the environment (for those who care about such things) but it also benefits our wallets. Replacing price with cost per use in buying decisions will help us save money and enjoy our possessions more.