The Matrix
Many people shop on impulse. Many others don’t view shopping as something to be planned out. So, they spend a lot of money and time where and when they should not.
At one point in my life, I thought that if I just focus on purchasing items based on needs and therefore cheap, I should be ok. It was only me back then, and I was young. I didn’t care much about quality as I used things for a limited time and purpose.
But, as I got older, got married, and started having kids, I began to realize there were certain things that demanded quality and along with it, a price tag. I was caught at a cross roads. On one hand, I wanted quality, but on the other hand, I didn’t want to pay for too much.
As I struggled with this change in my life, I tried to bridge this gap and created a framework to address this problem. I have come up with this Price vs. Value matrix which allows me to “know and compare the price of the dollar.”
Price vs Value Matrix
Quadrants explained:
Southwest corner. low value / low price. Items here provide instant utility, are very cheap, but they do not last long. Think of cheap clothing from Walmart. You can buy a shirt for $4, but they break so easily.
Southeast corner. Low value / high price. This is the super expensive items, but low quality. Think of lemon cars. So avoid this corner as much as possible.
Northeast corner. high value / high price. This represents things that are expensive yet are quality. A good example of this, in current situation, is the iPhone. These devices are very expensive, some almost the price of a computer. Yet, they are so useful, durable, and make life easier. If you don’t have time, you can opt for this, but there are ways to get the deals to move a little to the northwest corner.
Northwest corner. high value / low price. The best bang for your buck. This is the high value/low price. These items exist, but you have to be diligent in finding them as they are sometimes obscured, and you sometimes have to buy them separately and then piece them together. Or, look for specific discounts and bespoke arrangements. In other words, getting to this quadrant requires some thinking and work!
The matrix allows me to avoid just getting cheap stuff and choose the one with good relative value. There are people who constantly buy cheap stuff at the expense of exposure to certain things and experiences. So, there needs to be a balance between being cheap and having a quality of life.
Now that you have a good understanding of the matrix, the key question is how can you move your purchases to the Northwest quadrant? I recommend the following.
- Analyze if you are getting a good deal.
- Look at the alternative options and understand the details of the other offers.
- Break the components of the purchase and buy them in pieces.
Analyze if you are getting a good deal.
Back in college, I discovered a price discrepancy. The campus restaurant started doing combo pricing to accommodate student budgets. I am sure the thought was to price the combos cheaper than if the items in the combo were bought individually. Many students bought the combo without thinking about the prices. They just assumed the combo prices were cheaper (think when you go to McDonalds, you just choose combo 1, 2, or 3).
I was looking at the combo deals and realized that the pricing didn’t make sense. Three of the combo meal prices were off. It was cheaper to buy the individual items separately than to buy the full combos. It saved me ~$1 per combo meal equivalent. I was pretty happy, getting the full value of combo while paying for less.
The campus dining place didn’t realize the mispricing until 2 months later, yes, that long. That was 2 months’ worth of happy meals for me!
The key here is that don’t take thing as is. Always ask, “Does the ad make sense? how?”
Look at the alternative options and understand the details of the offers
Usually, for a 64g iPhone, you would pay about $775 just for the unit. I decided to buy my iPhone through a T-Mobile service subscription, but the question was where can I get the phone for cheaper? You will find that almost all outlets price these iPhones the same.
But… if you are a member of Costco, you get the iPhone relatively cheaper. Costco is great because they provide after-market discounts. I bought my phone from Costco, got a $50 rebate, two $20 battery back-up storage ($40 worth), and plus, as a member, points from a Costco purchase.
So, instead of paying $775, I only paid about $675. If you use the matrix, I just made moved my purchase event to the Northwest corner. Some may argue that you pay a membership at Costco. Yes, that is true, but that is very insignificant with the value you get from shopping in bulk at Costco.
Always ask if there are additional items the store is offering? I usually ask the sales person, “So what makes your deal better than the other vendors?” If they can’t answer this question, then you know where they stand.
Break the components of the purchase and buy them in pieces
As a family, we recently had our vacation in Scotland and London. It was beautiful and we thoroughly enjoyed our trips to the castles, lakes, beautiful mountains, and others. Prior to traveling, we had some decisions to make. In our original plan, we wanted to go to London first and then to Scotland. So we bought our flights to London and figured we could just buy our tickets to Scotland later. When you do this, however, the tickets from London to Edinburgh get really expensive. So, my wife and I had to look at all our options.
See the options and table below how we managed to save 64%.
- A regular British Air flight from Heathrow to Edinburgh will cost you at least $250 per person (from 9am to 3pm). So a family of 4 (our 3rd child was 6 months then) would cost ~$1,000. This flight has a lot of benefit if you, for example, land in Heathrow (from your prior flight) and want to go to Scotland immediately after. However, this is not a good value if you have some time in between flights to choose an alternative as the travel is only one hour. Why spend $1,000 for less than an hour’s flight?
- One substitute is to drive. Rental cars are cheap and affordable. But the drive to Scotland is about 11 hours. Rental cars of 4 seater range anywhere from $300/week to $400/week (took the lower number. These are automatic cars with bigger trunks. The smaller cars are priced lower). But cost of gas is $6/gallon in the UK (used to be $10/gallon). So assuming you rent, you would end up paying $150 for both ways. On top of this, you may have to rent a hotel for one night if you need to rest as it is a long drive and you essentially lose a day. Hotel rates run about $150 to $300 a night. Then you run the risks of speeding tickets. Total cost would be anywhere from $550 to $900. You also have to calculate the value of time on the road.
- Another substitute is the train, but it is also very expensive. Plus you have to travel first to central London which cost about $55 and catch the train there. Single round trip ticket cost about $110 one way. So $220 roundtrip per person. That is $935 (includes cab from airport to London) for a family of 4. You also have to calculate the value of time. Tour last for 8 hours one way.
- The last option (the option we chose) is to look for cheap flights but at different airports. EasyJet or Ryanair does not fly from Heathrow. So you have to commute and factor in the cab fare from Heathrow to Stansted. The flight per person is about $70 and flights leave from 11am to 3pm. So that is a total of $280 for the family. One hour of cab drive to Stansted is about $80. So, if you factor all these in, it is a total of $360 for the family and you only lose a max of 2 hours. Of course there’s the hassle of getting your luggage and customs, but you save $640. This is a 64% savings rate!
At the end of the day, the choice is up to you given the constraints you have and how much personal comfort you want. Personally, I don’t mind the little personal discomfort as long as they are not too burdensome. That $640 or 64% savings rate is worth more than the personal burden. These things of course will vary depending on the number of travelers, if you have kids, etc.
Food for thought
Human nature is generally prone to choosing the easy path. We like to avoid pain. We like to automate things. We some times forget to think about our decisions and just go with the easier route. The same goes with shopping. We just grab the cart and start buying stuff. Because of this, we end up spending a lot of money on purchases.
Couple this basic human nature with how shopping is done. You are then in for a trap. For example, when you are doing your weekly (or daily) shopping for groceries, more often than not, you are not cost conscious as the items you are purchasing are relatively smaller amounts (vs. big ticket items like buying airfare tickets for a family vacation or a big screen TV).
Then, add another layer the sales and marketing strategies of merchandisers. A good one is buying items on credit. You essentially break the big sum into smaller chunks thus the purchase appears cheap. When you buy a car for example, the car salesmen would ask you what you can afford on a monthly basis vs. telling you the actual price of the car. By rationalizing this to you, you convince yourself you can buy the car even though the purchase is very expensive.
In getting good value, one needs to apply smarts and work. It should go without saying right? But many still miss the point.
Let me share with you another story. I was telling some friends before that I really like real estate as an investment/asset class. Two of my friends said, “yeah, but it requires you to be a landlord and there’s too much work.” I told them, “Yes, that is true. But money doesn’t fall from trees either.” We can’t expect money to appear without any effort.
Consider these people.
- Bill Gates became a billionaire because he was coding at 3am while everyone else was sleeping.
- Warren Buffett became a billionaire because he worked so hard to research companies in the public libraries while others were watching football.
- Jeff Bezos was writing his Amazon business plan while driving across the country!
I believe that if you want to really be ahead of the curve, you have to use your brain and work really hard. I believe in thinking smart also, but smarts don’t come with ease. Smarts come over a period of time after working so hard that the brain muscles have been exercised so well that they process information so effectively and efficiently. I am a firm believer that even though we are all gifted with good brains, without working them, they atrophy.