The High Cost of Low Prices

by Mr. Cheap

NOTE: This is not a post about Wal-Mart. I like Wal-Mart and will preferentially shop there.

Obviously with a name like Mr. Cheap, I like to get a good deal. I understand other people who want to get a good deal. What I don’t totally get is people who want a cut-rate on a top-rate product or service. Champagne on a beer budget just isn’t possible.

Airlines get quite a bit of abuse about the low quality of service they offer. The seats are small, the service is surly, and the food is bad (and more recently, non-existent). The joke of this complaint is if you want top-notch service in the sky, you can get it. Just buy a first-class ticket.

Myself (and everyone I know) pick their ticket for a trip based on the lowest cost. Potentially I’ll pay a few bucks more for a direct flight, but I wouldn’t pay more for a “higher quality” airline. How can people blame the airlines when they rationally respond to this by doing everything they can to lower costs (and therefore price)?

I like to complain about phone service, Internet service and long distance. All of these could certainly be improved by enhancing their quality, but we all choose them based on price (and again, force companies to do everything they can to lower their price).

It would be reasonably straightforward to start a “high class” version of any of these services. Double the price and spend the extra enhancing the service. The fact that no such services exist makes me suspicious there just aren’t enough customers who are willing to support them (with their dollars).

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{ 16 comments… read them below or add one }

1 moneygardener

Nice Post. This is one of the features of free market capitalism. A need will always be filled if the demand is there. I most cases premium quality can be obtained if one antes up.

2 Four Pillars

Very true – especially on the service part. Places like Home Depot have reduced their service levels (a lot) but people like me still shop there because for the prices.

3 Matt

You get the service that you pay for… whenever I fly I try to get the best rate possible but I also know what comes with that rate. I’m not going to complain that the airline is trying to run their business for profit. But unlike airlines I don’t mind paying extra for better service in other aspects of my life – I understand the value of good service. Unfortunately a lot of people expect that same level of service for rock bottom prices and the two just don’t mesh up very often.

4 Nobleea

Yes, you do get what you pay for.

However, I think most would agree that Westjet provides better service than you know-who. Even though the prices are the same and in most cases, cheaper with WJ.

I also pick my ticket on the lowest cost. If prices are within 1%, I’ll pick the airline I like better or that has a better reputation.

5 Warren

I agree with Matt. I buy accordingly (cheap), but also go prepared with my expectations (low). As long as I’m there in good time, etc, I’m satisfied.

I took a long flight to the Carribean last fall and it was a budget flight of course. I couldn’t believe some of people’s complaints. This isn’t flying in the glamorous 50s. :)

6 telly

I’m with nobleea on this. You know who (Air Canada :) ) has notoriously poor service BUT high prices and that really bugs me.

Last month my husband and I flew to NYC for $38 RT each on Spirit Air. On a few occasions people have commented they wouldn’t fly Spirit because there’s not a lot of leg room and their service is “minimal”.

Something Spirit has done recently (they only fly within the US) is:

1) started charging passengers $5 / checked bag (including your 1st). No problem, I almost always fly with just a carry on.

2) started charging passengers for any drinks & / or snacks. Again, most people can do without a drink or snack for 2-3 hours and if you bring an empty water bottle and ask the flight attendant nicely, they will fill it for you.

I wasn’t willing to pay an extra $300-$400 for a little more legroom and a snack for a short flight.

7 CheapCanuck

I, too, am often blown away by people’s expectations of receiving luxury service at a bargain-basement price. Last year when we were in Costa Rica we stayed in this little hotel on the Caribbean coast. Cold showers, lumpy beds, and tears in the mosquito netting on the windows. We loved it! It was quaint, cost 20 bucks a night, was 30 feet from the beach, and beers were a buck. What more does a person need? Yet you read reviews on Tripadvisor, and though mostly positive, occasionally there will be a 1 star review from that spoiled traveler who expects a 5 star luxury resort for 20 bucks a night. Do you want cheap or luxurious? It’s not going to be both…

8 Gates VP

“Personal Luxury” actually seems to be a difficult sell these days in the fight for lower prices.

I know that I’ve personally spent money to support the endeavors that I enjoy. From the local coffee shop getting extra tips or business to the card shop that fueled my Magic habit, I’ve actually been willing to put in extra money to help them keep margins. My swing dance group uses the local legion for Saturday dances (when nothing else is on) and I specifically dropped $10-15 / head (me and the girl) on the first few weeks to ensure that they liked the traffic.

Personally, I think that we’ve really eschewed quality for quantity and that the cycle is such that everything is suffering. I can see the crunches on planes as “being fair”, but my new vacuum cleaner doesn’t even come with a 5-year warranty. I’m willing to pay more so that I don’t have to waste time buying a new vacuum every 2 years.

Same goes for health. How many of us have ever employed the services of a nutrionist, a dermatologist, a massage therapist (or reflexologist or acupuncturist) or a personal trainer? How many of us could greatly benefit from these services but just can’t “justify” the cost? (I’ve done a few of these and even I think that I’m short) How many people don’t eat well b/c it costs twice as much?

I honestly think there’s some type of “local maxima” for this stuff. We may not be there with the airline yet, but we’ve really crossed that point with health.

9 SavingDiva

I wish that I was able to spend a little bit of more and receive better service for a few different things….but the services just don’t exist…they just charge more for the same thing :(

I do pay more for organic food (produce, milk & eggs)…I also pay $7/month more for a gym that is more convenient and nicer than the cheapest gym in town…

10 Lewis Empire

I think the really sad thing is that the general public has come to accept that bad service and low quality should be the norm. As market pressure forced companies to lower their prices they reacted by dropping service. It happened so gradually that we all hardly noticed. Now, people who have been willing to pay a premium for better service have no options at all.

What’s interesting is that people have completely de-valued their time throughout the whole process. Explain to me why someone would drive 30 kms across a city, spend over an hour of their time (and consume the fuel for travel) to save $0.01 / litre on gas? Even on minimum wage, the total loss would be 24X the potential savings!

Can a direct flight save you an hour or two? How about the potential for a delay, lost lugguage, risk of death (ok that’s a little extreme) etc. All these things add up.

If nothing else, we need to factor in all of our time and energy when making purchasing decisions. If one store costs 10% more but you get help right away and don’t need to drive back and forth for more parts all weekend, I’d say pay the price and write off the extra cost as money buying you happiness!

11 Nicolas

“It would be reasonably straightforward to start a high class version of any of these services. Double the price and spend the extra enhancing the service. The fact that no such services exist makes me suspicious there just arent enough customers who are willing to support them (with their dollars).”

If I may put a damper on this paragraph, a lot of those companies do offer “unofficial” better service. If you are a good client (good meaning paing lots for cable, internet, phone…), you will get a quicker answer when you call customer services.

Which companies do it? I won’t tell but I know a few from my working experience.

Nicolas

PS: I hate the WJ light/jokes/too friendly attitude. But then again, I also hate to absence of service on AC.

12 Mr. Cheap

Nicolas: If I may put a damper on your comment, I think we all know that big customers get preferential treatment from businesses.

If a company has promised you preferential treatment from service bundling, I’d be skeptical whether you’re actually receiving any different service than unbundled customers (what a great way to up sell people to bundles! “honest man, if you buy the complete bundle we’ll actually solve your problems when you call!”)

My point was that most companies aren’t explicitly offering different levels of quality of service at different prices (with airline travel being the notable exception).

13 Four Pillars

Just to add to this – I would say discount brokerages are a good example of where people want the lowest prices but the best service… :)

14 Mr. Cheap

lol after my comment on your post today I was wondering if I should refer back to this! ;-)

15 Lise

At last, the voice of reason!

Why people expect Rolls Royce quality and service on a used Dodge budget is beyond me.

But we should all refuse to put up with surly/bad service. Regardless of the price, sales staff are paid to be customer service agents. I’m not even asking for a smile. Just courtesy.

16 Nicolas

Mr. Cheap,

But you are right, I’m out of line.

Nevertheless, I’ll ad that everyone should try, once in a lifetime, first class in a plain (real first class, not super regular on most canadian airlines i.e. free cookies and 1 extra inch), or be lucky enough to somehow get an upgrade. The experience is quite remarkable.

But maybe I’m just dreaming.

Nicolas

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