Price

You Get What You Pay For

I like a good deal when I see one, but be careful about going for the “cheap” price. Generally, you get what you pay for and many times it ends up costing you more and you either don’t realize this or realize it once it’s too late. Even commodity type services and products are not really commodities and here are a few examples:

Service providers: The pricing of service providers varies drastically, and includes virtually all services from home maintenance/contractors to professional service providers. Maybe you can find a good deal because the provider is newer in business and is under charging on purpose or is doing so out of poor business practices. However, a “cheap” service provider, especially one that you use repeatedly, will find it hard to provide quality service to you over time. This can be due to a high demand because of low prices, not being able to afford good, competent employees, and not having additional funds to invest in their business.

Products: If you are able to get the same product or software when it is on sale, then that is plain smart. However, when comparing two products, make sure that you understand why one is cheaper than the other. Reasons for a lower price can be because the product uses poor materials, is manufactured poorly, or does not contain a lot of features. The opposite can be true for a more expensive product, which is why you need to make sure that you purchase wisely.

Cost/benefit analysis: When making a purchase for your business, especially a large or important purchase, then weigh the cost/benefit. For example, a consultant may cost you $5,000, but you may expect that his advice will return $50,000 of profit. Alternatively, a software provider may cost you $10,000, but will save you $20,000 of expenses, including salaries. The examples are endless, and it is important to think of each expense as an investment in your business.

Don’t be fixated on price, but make sure that you understand what you are getting for the price you pay. A funny expression is, “If you pay peanuts, then you get monkeys!”

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Price vs. Value

Understanding the difference between price vs. value will probably save you a lot of headaches, improve your finances, and even your life.

To simplify, price is the dollar cost, while value represents the benefits or worth received.

Price is very easily measured, and is an okay measure to use when purchasing goods and services of relatively low significance. Goods are easier to compare because there are usually less variables to consider. As the purchase becomes more significant then so should the role of value.

Value is much harder to compare because some of the benefits are intangible. An example of a product purchase is a personal vehicle. You may have found two similarly priced vehicles that have many similar features, but the less apparent differences are the resale values, operating costs, and repair costs.

An example of determining the value of services can be made with an investment advisor. A good investment advisor will help you to not only achieve investment returns that are in line with comparative benchmarks, but also minimize the tax impact, allocate resources properly, and make sure that you do not make rash decisions, such as selling when the market bottoms out.

Take a step back and think of decisions that you make only on price. Now, factor in value and compare your experience and results. I am sure that you will be surprised.

Price is Only One Aspect

The easiest comparison when making purchases of products and services is price. It’s black and white, but it’s also very misleading. The key is to focus on the value received for the price paid. Here are some examples:

Insurance: There are a lot of commercials and ads out there promoting lower auto insurance rates. It is true that you may be able to get a lower rate by switching to another insurance company, but you may end up reducing your coverage, which is the reason for the savings. This is why it is a good idea to work with an insurance broker so that they can help to make sure that you are properly covered with the right amount of insurance.

Products: If you are comparing the same exact product between two retailers, the comparison is easier. Although, you may also want to consider other factors, such as customer service, return policies, and shipping charges for online retailers. If the products are not exactly the same, then the old rule, “You Get What You Pay For,” is generally true.

Services: Services are the most difficult to compare because you really don’t know the outcome until the service is completed. Again, “You Get What You Pay For” is extremely valid. You need to make sure that you know what you are receiving for the price paid. This is why it is very important to ask for a recommendation when selecting a service provider, especially a professional service provider as their services are intangible and not easily compared to others.