Savvy Consumers

by Mr. Cheap

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I was surprised, when I first tried renting the condo I bought, at how savvy potential renters were. My initial rental price was *way* too high, and people would come, look around, then politely decline to fill out an application. I dropped the price and kept getting the same behaviour. Finally I dropped it again and suddenly half the people who saw the place wanted to fill out the application (and some of them wanted to rush through the application process – they were afraid of losing the place to someone else).

A friend of mine with quite a bit more experience commented on how this was very typical. He always knows that he’s overpriced a unit if less than half of the people who see it fill out the application (if they don’t fill out the application on the spot, they aren’t going to rent it – even if they promise to think about it and call later).

This is VERY different from how people often throw money around without a second thought. I’m usually amazed at how little thought and consideration people put into purchases, even major ones. People walk onto a car lot to have a look around and walk off owning a car they didn’t intend to buy. People hook up with a real estate agent who talks them into a buying a property that costs FAR more then the original “high end” they’d agreed to consider.

John T. Reed explained this behaviour in one of his books. People shop for an apartment differently than how they shop for most things. Typically people decide what price range they can afford for rent. They look at a bunch of apartments in that price range, and they rent the nicest one (or once they’ve got a feel for nice and bad apartments in that range, they start filling out applications for all the nicer ones). If you’ve got an apartment that SHOULD rent for $1200 / month, and the people coming to see it are looking for something in the $1500 / month range the $1200 apartment is going to look poor compared to the other places they’ve seen.

They aren’t really any more sophisticated than that (they just want to live in the nicer places they’ve seen), but an excellent buying strategy emerges from this. The end result is they become very savvy consumers for apartments in the price range they’re shopping in – just by picking a price, looking at a number of items in that range, and taking the nicest one. The wouldn’t be able to appraise other units or say what price they SHOULD be renting at, they just can find the nicer apartments at a specific price point.

Landlords rationally respond to this by either dropping their rent price until a unit is priced correctly, or they add things in (like free cable or more appliances) until the unit they’re rent is competitive for the rent “band” it’s competing in. This is a surprisingly efficient marketplace!

When people shop for a place to BUY, they look at places, fall in love with one, then try to get the best deal they can on it. When people shop for cars, they pick out the make and model they want then try to haggle with the dealer. If someone is buying a guitar, they try strumming them and pick out the one that has the look or sound that is appealing to them. These are all buying strategies almost guaranteed to get you a BAD deal.

So, an easy short cut to becoming a savvy consumer for something is to pick a price, view multiple items available for that price, then take the nicest one you see. E.g. decide you’re going to spend $14,000 on a car, go to dealerships and tell them that’s the EXACT price you’re willing to spend (after taxes and add-ons and everything) then tell them to let you test drive something they’d have available for that price (and have them tell you what extras you’d get). Do this at 5 dealerships, then buy the one that you liked the best – chances are you’ll get a good car for your money. Explain to each salesman what you’re doing, and if he has half a brain (big if) he should offer you a package that’s a good deal to increase the odds that you buy from him. If the dealership you choose tries to increase the price at the last minute, just go buy the car you liked second best.

Corporations perhaps approach the problem the wrong way when they put a project up for bids and then award the contract to the lowest bidder (who then does his best to provide the minimum amount of work while still fulfilling the contract and getting paid). Perhaps they should instead give a general outline of their problem, set the price they want to pay, then have companies’ bid by offering the services they could provide for that price.

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{ 12 comments… read them below or add one }

1 Plop

Uh, so your only criteria is price? A 14K domestic car is going to be junk no matter what kind of ‘deal’ you get on it.

There’s a reason people shop for specific models/makes, because people don’t want to buy certain brands (I won’t ever buy domestic) or that fit their lifestyles/preferences.

2 Four Pillars

Plop – Mr. C has never owned a car which is probably why his estimated car price would have been accurate about 10 years ago. :)

Regardless, I think the point is that if people bought cars and houses the same way they shop for rental apartments, they might be better off because a) they stay within their budget and b) they might get a better deal – it’s hard to compare different cars/houses with different prices in terms of value so equalizing one variable (price) might simplify things a bit. Houses are a perfect example of where someone finds a house they like, tries to rationalize the cost in terms of house they can afford it and may not even try to get good value for their money.

3 telly

As usual, I disagree with plop entirely. I paid slightly more than $14k for my domestic car 9 years ago and it’s still not junk. And Mike, there are actually plenty of models that you can buy new for $14k these days. I think the cost of vehicles have actually declined over the last 10 years, especially with the Canadian dollar where it is now (and the subsequent adjustment of prices in Canada).

But back to the post. I thought it was great and something I’d never really considered but seems rather obvious now that you mention it. The truth is, I’ve probably gotten the best deals using this method.

Oddly enough, we ended up significantly under budget when we bought our house but mostly because we found it by accidentally driving by during an open house. Our realtor would likely have never shown us a house that was 30% less than our stated budget!

Great post – I know I’ve been the non-savvy buyer on more than one occasion. Vacations are probably another good example. Somehow a quick weekend getaway to a cheap resort can turn into a week at a 5-star hotel on some island that starts with “St.” something!

4 telly

Wait, when I said, “as usual, I disagree with plop entirely” I did not mean that I usually don’t agree with him / her but rather that I disagree with that theroy of domestic cars being junk. Phew…

(Can you add an edit button? :( )

5 Four Pillars

Telly – vacations are a perfect example of where a strict budget would come in handy.

I’ll see if I can add an ‘edit’ comment box like MDJ has.

Mike

6 Quietrose

Great post, Mr. Cheap! I think there are lots of factors involved in the “spend more than I was intending to” idea. People get emotionally invested and attached to their big purchases, like a car or house or fancy vacation, and this can make it harder to focus on getting the most of your buck or even spending wisely. Also, there might be a difference when people think of renting something (“I need to get the best value since I am not owning it”) versus owning (“It’s ok if this costs more, because I own it now.”) Just some thoughts on your intriguing post!

7 Kyle

I’m not sure if this works in Canada, but around here people look at

http://www.rentometer.com

to get an idea of how much other places are renting for. Makes it pretty easy to figure out about what fair-market value is for a given rental.

8 CanadianInvestor

Good post, makes a lot of sense, worth thinking about when buying anything. Ever tried applying it to stocks? e.g. the best $10 stock available?

9 Samantha

Great post.
Vacations are a great example. Course it adds a great simplicity to people’s decision making that I’m not sure is really there.

10 Mr. Cheap

CanadianInvestor: Well, I think it WOULD apply to stocks, but almost all stocks are the same price (let me explain). No one is going to buy individual shares (it costs me $20 at E*Trade to make an order, that would raise the price of a $10 stock to $30!). Instead people (usually) buy a certain amount (determined by $$$) of stock, E.g. I like to buy in $5K blocks, Mike usually buys in $2K blocks. People then try to buy the company they like best for that block of stock. Almost any stock can be purchased this way (notably excluding Berkshire Hathaway) – who cares if you’re getting 244 or 767 shares? Either way you’re buying $5000 worth of that company.

11 whatley

It works. go to sitepoint.com. if you want a web design, logo do a description of what you want and what you will Pay. you will get 20 to 60 offerings

12 Mr. Cheap

5$shake: You absolutely should start a blog! The main reason I’m here is to demonstrate that writing skills, critical thinking, straightforward arguments or making sense aren’t necessary to blog (I’m also ugly and I smell, but that doesn’t impact the blog). You’ll also find a number of spelling and grammar mistakes in my posts in the archive.

Welcome to the Internet.

That being said, I actually do find apartments and buying a car more similar than you do. Whenever I’ve gone apartment hunting, I see a bunch of places and often go back to the best of the bunch and rent it (time constraints haven’t caused me any problems). Maybe your rental market is tighter than where I’ve lived… I also find apartments pretty interchangeable (my second choice isn’t THAT much worse than my first).

I don’t see how a payment being made upfront or over time affects getting a good deal (I’d like a good deal either way), but as we’ve established, I’m clearly not as smart as you are (maybe I’ll try listening to some classical music and see if that boosts my IQ enough to understand).

Thanks for the comments!

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