Do You Spend Money Like an Idiot?

The Rich Maximize Value, The Poor Minimize Price!

The word value is defined as “relative worth, merit, or importance.” When making buying decisions, focusing on value as opposed to just price will help you to make much wiser decisions. Below is a buying guide to help you with your buying decisions.

When discussing value, the most important concept to clarify its meaning is the concept of diminishing returns. This term is defined as “Any rate of profit, production, benefits, etc., that beyond a certain point fails to increase proportionately with added investment, effort, or skill.”

What are diminishing returns in layman’s terms? Let’s compare IKEA, Ashley, and Herman Miller furniture. Let’s assume that the price of the furniture made by these companies is $1.05, $1.50, and $4.00 respectively. Let’s also assume the quality of their products is 1.0, 3.0, and 4.0, respectively. Which should we buy if we’re trying to maximize value?

The best way to solve this problem is to compare $/quality. We want to buy the item that gives us the highest $/quality (or, literally, bang for the buck). The $/quality of the furniture in question is: IKEA = .95, Ashley = 2, and Herman Miller = 1. Interestingly, it turns out that Ashley’s product represent the best buy even though it is more expensive than IKEA’s and less expensive than Herman Miller’s. Ashley represents a better buy than IKEA because we’re paying 43% more for 200% greater quality. Over a long period of time, IKEA’s product will probably cost you more per year to own than Ashley’s product because it will have to be replaced at a much greater frequency. Yet, many people allow themselves to be seduced by low initial cost. When making buying decisions, try to avoid penny wise, pound foolish traps such as the one illustrated above.

When comparing Herman Miller to Ashley, we clearly see the effects of diminishing returns. We are paying 167% more 33% more quality if we buy Herman Miller’s product as opposed to Ashley’s. The quality is not increasing proportionately with the price, and, in this example, makes the more expensive product a significantly worse value.

Conclusion

Whenever a your buying discount furniture try to consider the long run cost of ownership as opposed to the initial cost. Metrics such as $/year of ownership or $/quality will help you to make the best buying decision, even if they cannot necessarily be quantified.   

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