Savvy Consumers

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.