The other day, I was reading an article on how to cut down on expenses, in one of the weekend issues of Time of India. The author talked at length about how you should shop fewer times in a month, how you should track and pay off credit card bills regularly, how you should make a note of where most of your money is getting burnt etc. All that is fine. I think most of us know that paying credit cards bills in time saves us the interest cost. But if that was so easy, wouldn’t the credit card companies have shut shop buy now? Obviously, no one enjoys paying the interest and only when you can not make the entire payment, do you pay the exorbitant interest charges.

How do you then cut down on your expenses? One thing is certain: Cutting down on expenses always doesn’t necessarily mean living a lesser life. Spending money and blowing money are different things. Spending money can buy you a better lifestyle, blowing money wouldn’t. It would keep on cutting larger holes into your wallet, something I will write about in this article.

1. It’s differential pricing

I have made it a point to visit multiplexes only on Saturday mornings. On weekend prime shows, the ticket rates shoot up to Rs. 150 each while the morning show price is a mere Rs. 50. Why? Does it cost more to handle the prime time crowd? Absolutely not.

Business owners know that different people have different paying capacity. Their intention is simple: To make you pay the maximum you are willing to pay for a particular product or service. Each one of us have a threshold. For example, you can say, “I can pay a maximum 130 bucks for a movie at Inox, not beyond that”. Now, if for some reason, Inox ticket price is 100 bucks, it’s losing 30 bucks from you, given that you are willing to pay 130. If it charges 150 for a ticket, it will lose you entirely, of course.

Hence the catch is in charging different prices to different consumers, carefully studying their behaviour pattern to figure out how much they would be willing to pay. Rich guys (unlike me!) who would like to enjoy their evenings in the weekends would have to shell out thrice the amount I pay for watching a movie.

2. Early adopters pay through their nose

It’s pure economics. I remember what my grandfather used to tell me; “When a new product comes to the market, there are not many buyers. So the cost of producing each item is more. Hence the price is higher”. He probably was hinting at “Economies of Scale” that we keep harping on at B-school case discussions. However, that is partly correct. When Nokia N70 came out, it cost almost thirty thousand rupees in India. Do you think people went such mad over N70 and gobbled it in such huge quantities that now it’s price is a mere Rs. 7800, because the average cost of producing an N70 dropped drastically? Impossible.

Nokia always had “Economies of Scale”. It produces hundreds of thousands of phones everyday. The cost of producing an N70, I am sure, wouldn’t have changed much in these years. Even when the price of N70 was thirty thousand, Nokia must be producing it for a couple of thousand rupees, raking in a profit of more than twenty thousand per phone! Boy, someone looted you terribly.

Why would Nokia charge such exorbitant price then? It is again quite related to my point above; Nokia knows that people who love to flaunt a gadget before anyone else does would pay anything for it. A very well known fact on consumer behaviour. Now you know that If you buy a “lifestyle” product right after launch, you are being obscenely charged for a product that doesn’t deserve that price tag from a pure quality and feature perspective.

3. What Brand?

Branding is not free. If you pay Rs. 2300 for that pair of Reebok shoes, my guess is about Rs. 1000 is spent on branding (read paying the models, sponsoring cricket and baseball matches, buying TV spots etc.). The cost of producing a Reebok shouldn’t be more than a couple hundred bucks (ignore those air suspension and all those nonsense features, they don’t cost much to the company and don’t help you much anyway).

Brand of course guarantees quality because a lot rides on the consumer (and media) goodwill. But, the price charged is disproportionate to its quality because of the branding overhead. Fine, it gives you an aura and a standing in the society as many would swear, but is it always wise to stick to brands? Let me give you some examples:

First Example: The Rs. 180 T-shirt I purchased from a local shop in my home town is still as new and as usable as it was 7 years back. In these seven years, I have used and thrown (or used as dusting cloth) several Adidas, Reebok and Louis Philippe products.

Second Example: A shaving cream (Nivea, Gillette and the like) costs under Rs. 50. Still it almost lasts the same as a Gillette Foam Can and provides similar lather and soothing effect. The foam can costs about Rs. 300. Why? Because it’s upmarket. Same for Gillette Mach III razor (Rs. 300) versus Gillette Presto (Rs. 45 perhaps).

Functionality wise, I see almost no difference. Yet there is a huge difference in price. Who sees what razor I use or what foam I smear on my face?

So here is theΒ bottom line:

Go ahead and buy the latest gadgets. But be ready to pay much more than what it’s really worth. Be ready to pay for features that you would never use your entire life (like printing image directly from my Nokia mobile). Secondly understand differential pricing. Change your behaviour (if possible, like my Saturday morning movie trips) so that you take advantage of the differential pricing. Splurge on brands only when it makes a significant difference to your status, standing, ego etc. etc. Don’t spend for the sake of spending on a brand.

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