Informed Consumer Decisions and Pricing

A process for an informed decision

Impulse buying feels great for about ten minutes. A process slows you down just enough to choose on purpose.

Here is a simple five-step process:

1. Define the need. What problem does this purchase solve? A need is different from a want.

2. Set a budget. Decide your limit before you see the price tag.

3. Research. Compare brands, read reviews, check prices at several stores and online.

4. Compare total cost and features. Include tax, accessories, repairs and how long it will last.

5. Decide, then review. Buy, and afterward ask yourself if it was worth it.

Many things pull on your choice: your income, your friends, ads on social media, the brand, quality, convenience and even your mood. Pre-purchase research is the best defense against impulse buying. A common trick is a 24-hour rule: wait a day before buying anything that is not urgent. If you still want it tomorrow, it is probably a real want.

Purchases also have effects beyond your wallet. A cheap item made from materials that break quickly may end up in a landfill. A company's working conditions affect people far away. Some shoppers weigh these environmental and social effects when they compare products.

Durable goods and cost per year

A durable good lasts a long time, usually three years or more: a refrigerator, a car, a laptop, a couch. A nondurable good is used up quickly or lasts a short time: food, gasoline, a notebook, toothpaste. Use the three-year rule as a guide: if an item is typically used up or worn out in well under three years, treat it as nondurable.

Because a durable good is used for years, its price should be spread over its life. The cost per year is:

A better measure adds everything else you pay. The total cost of ownership is the purchase price plus tax, accessories, repairs, energy or fuel, and subscriptions, minus any resale value.

When you compare three competing products, make a table with price, expected life, cost per year, extra costs and features. Then decide which features you truly need.

You can also compare small items with the unit price: the price divided by the amount (per ounce, per sheet, per item). A 24 oz bottle for $\$3.00$ costs $\$0.125$ per ounce. A 32 oz bottle for $\$3.84$ costs $\$0.12$ per ounce, so the bigger bottle is cheaper per ounce.

How prices are advertised

Stores use many tricks to make a price look smaller or a deal look bigger. Knowing them does not mean you can't enjoy a sale. It means you are in control.

• Charm pricing: prices ending in .99, like $\$24.99$. Our brains read the first digits, so $\$24.99$ feels like "twenty-something" rather than "about $\$25$." The real difference is one cent.

• Was/now pricing: "Was $\$80$, now $\$50$." The "was" price is an anchor. It makes $\$50$ seem small. Ask yourself whether anyone ever really paid $\$80$.

• Percent off vs. dollars off: "40% off" sounds big. Always turn it into dollars and compare final prices.

• Urgency: "Today only!" and countdown timers push you to skip research.

• Bundles and "free" offers: "Buy two, get one free" only helps if you needed three.

Remember that the sticker price does not include sales tax. Sales tax is added at the register and varies by state and city. The price you pay is:

Inflation and what it does to prices

Inflation is a general rise in prices over time. When prices rise, each dollar buys less. This loss is a drop in purchasing power.

To measure how much one price has changed, use percent change:

Inflation affects choices. If prices are rising, you may buy a big-ticket item sooner, switch to cheaper brands, or delay a purchase. If your income does not rise as fast as prices, you can buy less with the same pay. The government tracks average price changes with the Consumer Price Index (CPI).

Negotiating a price

Some prices are fixed: a grocery store will not haggle over a gallon of milk. Others are negotiable: used cars, used items online, flea markets, big-ticket services and some furniture or appliance stores. When a seller says "I'm flexible on price," you have an opening.

Preparation is the main tool:

1. Research the market value. Look at similar listings. If three similar snowboards sold for $\$120$-$\$150$, you know $\$180$ is high.

2. Decide your limit. Set the most you will pay (your walk-away price) and a target below it.

3. Inspect the item. Defects or missing parts give you a fair reason to ask for less.

4. Be polite and make a reasonable offer. A clear offer backed by evidence works better than a lowball.

5. Be willing to walk away. If the price does not move, you can leave. Sellers often call back.

Negotiating affects both price and the decision. It can save you money, but only if you have done the research. The same facts about the market help you avoid overpaying even when you do not haggle.

Back to the sneakers

Now return to the two pairs of sneakers. Pair A is $\$60$ and is on "sale." Pair B is $\$48$ and has no sale tag. Suppose the sales tax is 8% and Pair A should last 2 years while Pair B lasts about 1 year. First, ignore the "was" price and look at what you would pay at the register. Pair A costs $\$60 \times 1.08 = \$64.80$, which is more than your $\$60$, so you would need to stay on budget or look for a better price. Pair B costs $\$48 \times 1.08 = \$51.84$, which fits your budget. Per year, Pair A costs $\$64.80 \div 2 = \$32.40$ and Pair B costs $\$51.84 \div 1 = \$51.84$, so Pair A is the better value if you need its features and can afford it. If you do not, or if you will outgrow them, Pair B may still win. The sale tag was never the answer. Your process is.

Summary