Author: Mr. Cheap

Categories
Frugal

Buying in Bulk

We have a ritual in the Cheap clan.  Whenever a member is “nearing the end”, we all gather around the matriarch or patriarch.  They’ll look each of us deeply in the eye to convey the gravity of the situation, then when their hour approaches, hold the gaze of a younger member of the clan (who may not have the message fully sunken in yet) and gasp “buy in bulk!” as their final words.

Its good advice.  We’ve mentioned the chocolate article Guiness416 pointed us to a couple of times, and basically their business is based on this (buy in bulk, then get a massive markup when you sell smaller amounts).  The success of stores like Costco have been built on the idea that if you’re willing to buy a lot of something, the store will give you a good price.  A while back at “The Real Canadian Wholesale club” I came across a MASSIVE can of chili (we’re talking army feeding size) for under $10 (which is quite a deal when you consider they sell a single meal of chili in a can for $2.50).

A few of the downsides of buying in bulk have received a lot of press:  Don’t buy stuff that will go bad before you use it, don’t buy stuff you don’t have room to store (“Ooh, that’s a good price on twelve pounds of nutmeg” – Marge Simpson) and don’t buy stuff you don’t need, just because its a good price.

The one element of buying in bulk that always gets me a bit hot under the collar is when stores try to trick you.  They’ll have a larger amount of something for a HIGHER price per unit, instead of a lower price.  People assume they’re getting a deal buying more, and end up paying more for the larger size.  Sobey’s has 3 lbs of baby carrots for $3.99 and 2 lbs. for $1.49.  If you buy two 2 lb bags you get an extra pound of carrots for a buck less, but I’m sure some people see the larger bag and just grab it.  Recently at Wal-Mart I picked up a box of Rice Crispy treats (a box of 16 for $5) and on my way out saw a box of 14 for $4 (grr).

The simple way of avoiding this is to look at the price / unit of something (weight if they have it, or by item for something like Rice Crispy treats).  If your math skills aren’t so great doing things like this in your head, practice! (and until you get good, carry a pocket calculator).

The real zinger is its often picking the right product that saves you big money instead of trying to get a discount by volume (don’t tell my relatives).  After I purchased the Rice Crispy treats, I came across “Crispy Rice” treats (off brand knock-offs) for 5 for $1 at Dollarama *sigh*.  Similarly, if you made your own chili it’d cost way less than $10, and if you bought regular carrots instead of baby carrots, they’d be way cheaper too.

Categories
Announcements

Wacky Business Idea #10: A Free Market Corporate Structure

Apparently the modern corporate structure was developed shortly after World War 2.  The idea of a hierarchy, where everyone reports to someone above them all the way up to the CEO was modeled on the military structure men returning from battle were familiar with.  I don’t know much about corporate organization, but it seems to me that there would be better ways to organize a company.

Conglomerates were big in the 60’s, where the rationale was that there were economies of scale in merging companies.  It turned out that most of the “gains” were accounting tricks, and in fact the monstrous companies were LESS efficient as they got bigger.  Large organizations with central planning just don’t work.  Look at any government, any military or any large company.  Its a debatable point, but I feel that the benefit of large companies is having the resources to subvert government (through lobbyists) rather than greater efficiency due to their size.

A friend was recently part of a project at the company he works at where they were going to buy technical services from a partner for $200k.  Everyone was ready to go for the deal, but he put the brakes on it.  He said he had to investigate further before he could sign off.  The next day one of the other people in the meeting came up to him and said “I was really angry when you wouldn’t sign off yesterday, but afterwards I talked to some people in my group and we can do the same thing for $50k”.  I suspect this is going on all the time, people within companies can’t be bothered to look for better arrangements, and happily sign off on bad deals because its not their money being spent.  They can hide behind the idea that this is a trusted vendor if it ever comes back on them that they overpaid.  A structure where they have greater investment in getting the best bang for the companies buck is clearly a good thing.

I’ve thought that an interesting approach to running a medium or large size company would be to model its structure on the free market.  Each group would provide services to the rest of the company and charge them what the (internal) market would bear.  If one group start gouging the rest of the company, competition could start offering the same service and bring them back into line.  So groups could choose who they wanted to manage payroll for them, work out a service contract with them, and if they were unhappy with the price or service, switch to a competitor (or handle payroll themselves).

Company profits could be used as the currency within the company.  If someone leading a group was able to deliver superior results with less resources, the excess would be hers to take home as a bonus.  If someone runs an inefficient team, they will make less than their leaner competitors.  At each level individuals will have a personal incentive to deliver the best results for the lowest cost.  It could be something like at the end of the year, they get a bonus of 10% of the company profits they’ve “accumulated”.

Each group could be given resources and complete discretion over who they hire and where they spend their money (they can buy new computers, but that leaves less resources to increase salaries or take home as a bonus).  This allows entrepreneurs to flourish within the company.

The biggest problem is that people will obviously game the system (whatever the rules are, they’ll operate to try to maximize their personal benefit within them).  The beauty of the free market is it leads to people being of service to society in order to personally benefit.  The flow of currency through the company therefore should be as closely tied to the business practices as possible (such that “gaming the system” will lead to higher profits for the company).

Perhaps salesman will be given credit based on the gross sales they make.  They need to actually purchase what they sell from the manufacturing department (who, in turn, buys from R&D).  Groups are free to make whatever deals will make the system as a whole work (perhaps giving a certain salesman exclusive access to a product in exchange for a guaranteed order size or whatever).

People within the company will be held accountable as well, where if there’s a product defect or a legal problem, the cost of that lands on the department that’s responsible (perhaps destroying their bonuses for the year or leading to their group being dissolved).

It would be trivial to “spin off” a part of the company that might offer valuable service to other companies and individuals (just make them autonomous and keep doing business with them).  Equally, acquired companies could keep doing business the way they always had, and continue interacting with the rest of the company.

The people at the top would be mainly focused on enforcing contracts between the groups, and providing the general rules for interactions between them (which should be kept as simple as possible, any ideas to create new and convoluted interactions, rules or requirements should be avoided).  At the end of the year, the 90% of profits goes to the owner(s) or shareholders.  They would count on the increased efficiency of everyone in the company continually looking for better ways to do business would make the 90% worth more than 100% of a totalitarian company.

Categories
Announcements

Pricing

A big challenge for anyone running their own business is determining the right price to charge.

There are all sorts of ideas that claim to give you the right price (such as the idealized “supply and demand” curve from economics), and all sorts of wacky exceptions (such as loss leaders at the grocery store).

Many technical people fall into a trap when they get into business.  An elderly professor I know who had tried to run his own business found this was the core of what limited his success.  Even after he warned me about it, I went and did the same thing when I started my business.

Techies seem to gravitate to the idea that the right way to price products or services is to add up the cost, add a reasonable profit margin on this, then sell it for that price.  If, after labour, materials and everything, widgets cost you $30 to make, selling them for $42 (a 40% markup) is clearly the answer.

The joke is, a widget might not be worth $42 to the buyer.  It may be worth $20 (in which case you’re a fool to make them), or $400 (in which case you’re a fool to sell them for $42).  The right price to charge for something is the highest price customers are willing to pay.

Commodities are the exception to this, as they get driven down to the price to bring them to market plus a small markup.  There’s no real difference between brands of salt, so manufacturers will keep undercutting each other until the price gets to the “techie ideal” of cost + markup.

Kenny Kramer (the real life basis for Cosmo Kramer) sold electronic jewelry during the disco years.  He was able to get them manufactured dirt cheap, then sell them for a super-high markup.  This allowed him to not work for a years, long after disco was dead (will disco ever REALLY be dead though?).

Guiness416 recently pointed us towards a great article about gourmet chocolate.  The punch line is they buy chocolate that’s available to anyone and sell it in smaller chunks for a 1,300% markup. I was horrified reading it, and it just seemed so scummy to me.  It’s probably good business.  People with too much money want to find something they feel is extra-special, and are delighted to pay an outrageous price for it (given that the company is still in business years after the article was published).  They aren’t selling chocolate.  They’re selling gifts that say to the recipient “this cost a lot of money”.

Everyone has heard that the fountain drinks you buy at the movie theater for $4 costs them $0.10 to provide.  Is a 4000% markup reasonable?  Is it reasonable if it subsidizes other parts of the theater experience?

Long time readers know Mike and I would never say a bad word about real estate agents.  However, a case recently came up in Australia where a real estate agent bought a house worth $300k, from a man in a retirement home, for $150k (good thing they have a duty to their clients, eh?).  In this case I think its clearly wrong because the seller had a diminished capacity and the agent took advantage of that.  The same thing happened to my grandfather:  a real estate agent bought a parcel of land off of him for $5k, then resold it 6 months later for $10k.  This was 40 or 50 years ago, so it was a significant amount of money at the time.  Heck, it even landed the agent in the Cheap clan’s “Big Book of Grudges”.

I find it hard to shake the feeling that this isn’t right (I sure wouldn’t be comfortable taking advantage of someone like that), but all evidence seems to tell me that I’ve got the wrong outlook on this issue.  Or at least I don’t have the right outlook if I want to be successful in business.

Is it wrong to charge far, far more for something than it cost you?  What are the limits to “looking out for your own interests” and at what point does it become unethical gouging?

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Announcements

Happy Labour Day

If you’ve got the day off, enjoy the break!  If you’re working, our sympathies.

Mike & Mr. Cheap

Categories
Opinion

When Quality is an Illusion

Enter in the Giant Book Giveaway if you haven’t already!

There are definitely times when it pays to buy quality.

I used to really like BiWay (a chain of el-cheapo Canadian discount apparel and general goods stores – think half-way between K-mart and a dollar store).  I used to proudly tell my friends “BiWay is *my* way!”  Surprisingly I’ve never gotten a job offer from any advertising agencies…

I gave up on them when I bought a pair of hiking boots and they had a gaping hole within 2 weeks of purchase.  A $120 pair of hiking boots that lasts a few years is a much better deal than a $25 pair that lasts two weeks.

I think people go too far with this and buy things that they *THINK* are higher quality, but actually just cost more.

Consumer Reports has done studies on wrinkle creams and found that the cheap ones work better than products that cost more than 10 times as much.  Apparently a number of ground coffees, pops (soda for Americans or “Cokes” for Texans), and potato chips available on the market are the same, except for the packaging and price.

I keep wanting to set up a taste test for friends and see if they can actually tell the difference between store brand cola and Coke or Pepsi.

One of my aunts claims that when she first started buying household products she experimented with what was available, found the products that work the best, and has been loyal to them ever since.  I’m not 100% sure I believe that she was extensive as she claims, but if she was that’s a good way to actually find things that work for you – certainly much better than assuming “higher price = better product”.

In “Influence: The Psychology of Persuasion” (an excellent book by Robert B. Cialdini), he relates the amusing anecdote of a friend who runs a store and was having trouble selling some gemstones.  Going on vacation, she got frustrated and told an employee to cut the price in half.  She was delighted to come back and find they’d sold out, but the employee had misunderstood and doubled the price.  She couldn’t figure out why customers wouldn’t buy them at one price, then grabbed them up at double that price.  The author explains that the customers were using the price as a shorthand for the quality, and figured they must be valuable gemstones if they were being sold at such a high price.

Knowing when quality matters and justifies a higher price, and when we’re just being fooled by a meaningless brand name seems to be one of the most valuable distinction for shoppers.  The most irritating part of the whole process is there is a limit to the value of time spent investigating the difference.  If it takes you 10 hours of time to figure out that a product that’s $0.25 cheaper is just as good, its going to take you a long time to recoup your time investment.

What products have you found that quality matters and which is it meaningless for?

Categories
Business Ideas

Stockpiling Garbage

Humans are very good at generating waste and very bad at dealing with it.  The city of Toronto exports dozens of truckloads of trash every day.

Basically for this idea, a company would be set up that would create a very secure facility for accepting garbage.  As high a rate as possible would be charged for dumping, and obviously care would be taken that no toxins leak into nearby groundwater or otherwise poisoned the local environment (as much as could be avoided when you’re operating a garbage dump – I imagine that some things are unavoidable).

Even if it was just making enough to cover costs, the facilities that accept the garbage would be grown as quickly as possible and would take in as much garbage as possible.  Profits from operation would be rolled back into growth.

Long term, the business would count on two things happening:  1)  resources increase in cost as they become most difficult to extract from natural sources and 2)  technology to reclaim resources for manufactured items improves.

Over time, as elements in the garbage dump increase in value, some will eventually hit the point where they can be extracted from the dump at a profit.  At this point, while safely storing the waste is an ongoing concern for the business, the garbage is treated as a mine.  Valuable parts are removed, processed, and sold at a profit.  On an ongoing basis, waste can continue to be accepted and stockpiled for future times when it may become economical to reclaim them.

Some elements, like toxic biological waste, might never be cost-effectively reclaimed.  This would be a part of the business, and these elements would just have to be safely contained while extracting valuables mixed with them, then safely stored again.

Certainly anyone who owns a dump would be delighted to mine it if it ever became cost effective to do so.  Dumps currently do this by charging people to take things they find, and actually post guards to prevent garbage pickers.  The core of this idea is just to look at the economics of running a dump, and factor in changes in technology that may change the future value of what you’re accepting (changing it from something that costs money to accept now to something that is worth money in the future).  There may be approaches to storage that may make future extraction easier, which could be done to plan for the future.

It *might* be possible to be paid to accept existing dumps (where the company takes on the future responsibility of maintaining them).  These could be happily entered into, with the knowledge that the business you’re building is specialized in reclaiming resources, and each of these sites would represent future profits.

I don’t really know anything about garbage treatment, storage or disposal.  This consideration may already be factored into waste management.  I know that recycling right now, even when end users sort things, isn’t cost effective for anything other than aluminum.  In impoverished countries, often dumps are viewed as a resource by some of the poorest-of-the-poor who make a living digging out items of value from it.  I’m convinced this equation will change in the future, and an automated solution for doing the same will be worthwhile in a western context.

For this post, or any other of the wacky business ideas I post, obviously I’m releasing any ownership claims I may have over these ideas. If you like something I post and feel like you can make money from it, please feel free to do so! Let me know when you’re opening and we’ll do a post on it to give you some free advertising.

Categories
Frugal

Valuable to Worthless

Everyone is familiar with the idea that a new car loses value the instant you drive it off of the lot. Having it sit there shiny and new is worth something that disappears when you make the purchase. A number of other products have this same property, although we sometimes delude ourselves into thinking they don’t.

I’m not saying that people shouldn’t buy these products (if they improve your life, why not?), but just that we shouldn’t fool ourselves into thinking we’re sitting on something valuable that could be sold to someone else if we no longer want to own it. Any value these things provide is restricted to us as the owner and perhaps we should view their use more as a service, comparable to our daily newspaper or utilities.

Furniture and Appliances

Meg at World of Wealth recently got a used fridge from a tenant in exchange for $275 in rent. She was quite pleased as the unit didn’t have a fridge, and she would have had to buy one before she could rent it to the next tenant. I actually think she over-paid. Having just one property (and my first tenants are still there), I haven’t experienced this personally, but long term landlords get SWAMPED with furniture. A number of people seem to take the view that its easier to just buy replacements than deal with moving it.

The last place I lived in Toronto, when I was looking at it the landlord asked me what furniture I had. I admitted that my current place was furnished, and I didn’t have much. With a smile she told me she could provide me with any of the basics (bed, tables, chairs) until I bought my own, or if I was content with her’s I could just use them. We went over to another one of her properties and in the basement she had a mini-furniture store of things that had been left behind by previous tenants.

My hat is off to landlords who offer a “furnished” suite at a premium price. First they get a free furniture collection from tenants moving out. All they have to do is store the things, than they can get monthly payments from something they got for free. Smart.

Books

I *LOVE* books and had quite a collection that I eventually got tired of moving (a box of books is HEAVY). Having assembled them over the years, I was convinced that they’d be worth at least a couple of bucks to someone. When I got looking into it, it turns out that used bookstores typically just give you credit (so you’re not really selling them, just exchanging them for a smaller number of someone else’s books). Selling on-line is more trouble than its worth (people will just want to buy a couple of books each: meeting them or shipping to them is a pain in the butt).

Eventually I just gave all my books to friends who might be interested (and told them to toss anything they didn’t want or when they were done with them). Those I couldn’t find a home for, I turned in at my home town used book store and gave the credit to my family (so we’ll be getting free books for the next few years).

A friend recently inherited a bunch of books from a boyfriend who moved away and was looking forward to making some money selling them. I laughed and wished her good luck (in the end I think she left them out in her office for anyone who wanted them, then threw the remainder in the trash).

Jewelry

I read once that the early appeal of jewelry was that it was wealth in a concentrated, portable form. Beyond looking nice, it also represented a worst-case security policy for women. If they needed to flee their home, or if their husband unexpectedly passed away, jewelry could always be exchanged for the necessities of life for them and their children.

Da Beers’ well known sales pitch “A diamond is forever” has made sure that few people actually try to sell their diamonds. Sadly when they do, they often find its much harder than they expect. One amusing anecdote involves a computer guy who stole money from the bank he worked at, transferred it to Swiss company in exchange for diamonds, and then couldn’t sell the diamonds. When he was caught, the bank was initially relieved, since they figured recovering the diamonds was as good as getting the money bank. Then they tried to sell the $8.3 million in diamonds and couldn’t find a buyer. The same article relates the story of diamond thieves in New York that sold $50k of diamonds to a fence for $200 (who in turn wasn’t able to sell them).

With artificial diamonds that can be inexpensively created (and are identifiable only because their crystalline structure is too perfect) I would be very nervous buying a diamond that I expected to retain its value in the coming years.

Is there anything you’ve encountered or purchased that you thought would be easy to resell but turned out to dramatically lose value after purchase?

Categories
Personal Finance

Scholarships and Government Grants

Thicken My Wallet recently wrote an interesting post about “Leaving free money on the table“. The gist of the post is that there are a number of scholarships and government grants which go unclaimed each year, and that just by applying you can get free money.

This is true for what it is.  My favourite example was a Kitchener/Waterloo region housing lottery for first time home owners. They could apply to a lottery to help with up to $11.3K to assist with their down-payment. No lottery was held, because fewer applications were received than the number of awards they had to give (so everyone who applied got it). I’ve never been as disappointed to own property as when I read about this.

There is another side to the issue (with respect to TMW).

Years ago I started a business that was intended to use some of this “free money”. The short version was that I’d sell something of value to families that they’d be able to purchase with grant money (which I’d help them apply for). The business itself actually fell under a number of categories which would have qualified for grants.

In total, I sold to ONE family who used grant money for the purchase (and they bought out of a grant they already had set up – they were actually the ones who initially suggested the business venture to me). They were very happy with the purchase, and continued to buy (even when the grant was pulled back and they had to pay 1/2 the amount out of pocket).

There’s a version of the advance-fee scam that works by contacting individuals or businesses and telling them that they qualify for a grant, and they just need to pay the small application fee to receive a much larger sum of money. Everyone likes free money, and people certainly get taken in by this.

Even TMW’s $500 scholarship came about because someone on the inside met him and told him about it (they came to him). There are no guarantees that you’ll find grants as easily as he did (and certainly no guarantees of your success or the ease of applying). There are businesses (in Canada many “film” companies) that exist solely by applying for government grants. They work darn hard to get the money, but sadly their hard work is focused on navigating the bureaucracy rather than creating value (I suspect they work harder to get the grant money than they do on the funded projects).

I once suggested to a friend that a good business to start would be a service to help people get grants. I looked into it, and found it already exists. PLEASE NOTE: I’m not endorsing the linked-to companies! They require upfront payment to become a member or to hire a “consultant”, rather than collecting a fee if the grant application is successful. This made me suspicious to do business with them. They clearly have an incentive to build membership numbers rather than get grants awarded.

Much like the coupon queens, my experience is you often hear about this juicy, unclaimed, free money, but once you actually go looking for it, you’ll find it to be labour intensive enough that applying turns into a relatively low-paying job.

Other than one-time “lucky strikes” has anyone been able to consistently apply and receive grants or scholarships?