Spending
Spending is inevitable.
That's why it is good to have a spending plan or at least some strategies on how to maximize your dollars. Money is a representation of work done and conversion to goods and services. You could have a billion dollars in Venezuelan but that would only be worth 278.67 USD. Money is only worth what you can purchase with it, or in other words, purchasing power. Most people are making as much money as they physically can each year so their income or purchasing money is fixed. But there are some strategies to extract more value from your dollar.
Price Discrimination
This is when a merchant sells a good or service at a different price to each customer they come in contact with. Think of airlines, hotels, car rents, even Amazon does this. It is quite easy to raise the price for someone without letting other consumers know on the internet vs in a physical store. The seller is hoping to price the product at the highest you are willing to pay to maximize its profits. For example, say a website is selling a t-shirt for $20, you think that's a great price so you purchase one. You would have been willing to pay $25 for that t-shirt so in essence there is $5 that the seller could have made extra but because the price was lower ($20) the extra profit was missed out. That is called Consumer Surplus. Some customers would only purchase if the t-shirt was listed at $15 so those customers would be missed. By raising prices for those willing to pay more and lowering prices for those only willing to pay less, profit is completely maximized to sell the most amount of t-shirts always at a profit, albeit different amounts of profit.
Tech companies are classic examples of this type of behavior. Uber, Lyft, Ubereats, Doordash, Skip the Dishes when entering a market will bombard consumers with ads and deals that are below market cost in order to build market share of loyal customers. Consumers get goods and services at a great rate and then the business slowly raises the rates and cuts back on deals to regain profitability.
I am very much against services like Skip the Dishes and Ubereats, but I took full advantage of deals since I had what they wanted. They wanted my money and loyalty and I gave them a bit of money and zero loyalty. DoorDash gave me free McDonalds with no string attached. Ubereats gave me around ten, 75% off coupons, and even with Ubereats inflated pricing compared to purchasing directly with the restaurant it was insanely cheap. But when the discounts dried up, so did my patronage. They want to form a habit and a relationship so it is important to note what their intentions are and stick to your spending plan and evaluation of value received.
There are show home events where a developer will pay food trucks to give out free food to attract potential buyers to a new community (Just don’t fall in love with a show home).
Fast Food
I have spent a lot of money on fast food. I spent $849.15 in 2014, $1,239.36 in 2015, $1,423.42 in 2016, $1,315.51 in 2017 and $2,142.65 in 2018. So I am kind of an expert on the subject. Just like Kevin in The Office the key is to let the restaurants fight for your business. Just like price discrimination businesses want to give coupons and deals to those that would not normally visit their establishments, maximizing their profits by selling food at full price to those willing to pay full and discontinued price to those not willing. They send coupons in the mail but that is annoying. The best way to get coupons is to download the restaurant's individual app. Not only can you order from the app and get coupons, they sometimes have in-app points you can earn on every purchase getting you completely free food without changing your behavior. Now they do this to try to keep you loyal to their brand so you will need to mentally disconnect from the points and ignore them so they don’t change your behavior. This is hard to do especially because they will make the points expire creating urgency to come back and order more before it is too late. Decisions need to be unbiased by these pulls and completed objective to what will get you the most food for the least amount of money.
My goal for eating out is normally $5 a meal. So just go through each app, one by one and evaluate the deals. I would focus on the food aspect. Paying anything for soda is a rip off. Keeping a flat of water or having a reusable water bottle with you is a great way to save money since water is free or practically free. Now using coupons is super lame and can be socially awkward, but using an app there is no human contact and you can save $1 - $4 depending on the deal. Which might not seem like much, but when you are like me and eat out almost everyday, it can save hundreds of dollars.
You may be thinking I’d much rather eat what I want when I want and not have to deal with who has the lowest cost on an app currently. Which is fair, but would you rather you have a little bit of good pizza or a lot of alright pizza? (Insert another Office reference here) Now I think they got it wrong on The Office and that Micheal was correct, as personally I would rather have food I was okay with at a cheaper cost vs food I really am craving for a lot of money.
This is when a merchant sells a good or service at a different price to each customer they come in contact with. Think of airlines, hotels, car rents, even Amazon does this. It is quite easy to raise the price for someone without letting other consumers know on the internet vs in a physical store. The seller is hoping to price the product at the highest you are willing to pay to maximize its profits. For example, say a website is selling a t-shirt for $20, you think that's a great price so you purchase one. You would have been willing to pay $25 for that t-shirt so in essence there is $5 that the seller could have made extra but because the price was lower ($20) the extra profit was missed out. That is called Consumer Surplus. Some customers would only purchase if the t-shirt was listed at $15 so those customers would be missed. By raising prices for those willing to pay more and lowering prices for those only willing to pay less, profit is completely maximized to sell the most amount of t-shirts always at a profit, albeit different amounts of profit.
Consumer Surplus
“A consumer surplus happens when the price consumers pay for a product or service is less than the price they're willing to pay. Consumer surplus is based on the economic theory of marginal utility, which is the additional satisfaction a consumer gains from one more unit of a good or service.” This is great for consumers as they go away thinking they got a great deal, “I would have paid twice that amount”. But for businesses they are missing out on revenue if the majority of consumers would pay more for their goods or services.You Have What They Want
The thing all businesses and companies have in common is they want your money. They want to entice you with ads and sales and are willing to go to great lengths to separate you from it. It is similar to Kevin from the show The Office where he wants to buy a lot of Girl Guide cookies from both Toby and Darryl. They both want Kevin’s money so badly they are willing to dance, sing and do all manner of silly things to entertain Kevin. Businesses are the same, but instead of singing and dancing they will give you free samples, items at a discount, coupons, free trials, promotional offers etc. This is a great place to maximize your dollar as companies are essentially losing money in order for you to buy or try their products.Tech companies are classic examples of this type of behavior. Uber, Lyft, Ubereats, Doordash, Skip the Dishes when entering a market will bombard consumers with ads and deals that are below market cost in order to build market share of loyal customers. Consumers get goods and services at a great rate and then the business slowly raises the rates and cuts back on deals to regain profitability.
I am very much against services like Skip the Dishes and Ubereats, but I took full advantage of deals since I had what they wanted. They wanted my money and loyalty and I gave them a bit of money and zero loyalty. DoorDash gave me free McDonalds with no string attached. Ubereats gave me around ten, 75% off coupons, and even with Ubereats inflated pricing compared to purchasing directly with the restaurant it was insanely cheap. But when the discounts dried up, so did my patronage. They want to form a habit and a relationship so it is important to note what their intentions are and stick to your spending plan and evaluation of value received.
There are show home events where a developer will pay food trucks to give out free food to attract potential buyers to a new community (Just don’t fall in love with a show home).
Fast Food
I have spent a lot of money on fast food. I spent $849.15 in 2014, $1,239.36 in 2015, $1,423.42 in 2016, $1,315.51 in 2017 and $2,142.65 in 2018. So I am kind of an expert on the subject. Just like Kevin in The Office the key is to let the restaurants fight for your business. Just like price discrimination businesses want to give coupons and deals to those that would not normally visit their establishments, maximizing their profits by selling food at full price to those willing to pay full and discontinued price to those not willing. They send coupons in the mail but that is annoying. The best way to get coupons is to download the restaurant's individual app. Not only can you order from the app and get coupons, they sometimes have in-app points you can earn on every purchase getting you completely free food without changing your behavior. Now they do this to try to keep you loyal to their brand so you will need to mentally disconnect from the points and ignore them so they don’t change your behavior. This is hard to do especially because they will make the points expire creating urgency to come back and order more before it is too late. Decisions need to be unbiased by these pulls and completed objective to what will get you the most food for the least amount of money.
My goal for eating out is normally $5 a meal. So just go through each app, one by one and evaluate the deals. I would focus on the food aspect. Paying anything for soda is a rip off. Keeping a flat of water or having a reusable water bottle with you is a great way to save money since water is free or practically free. Now using coupons is super lame and can be socially awkward, but using an app there is no human contact and you can save $1 - $4 depending on the deal. Which might not seem like much, but when you are like me and eat out almost everyday, it can save hundreds of dollars.
You may be thinking I’d much rather eat what I want when I want and not have to deal with who has the lowest cost on an app currently. Which is fair, but would you rather you have a little bit of good pizza or a lot of alright pizza? (Insert another Office reference here) Now I think they got it wrong on The Office and that Micheal was correct, as personally I would rather have food I was okay with at a cheaper cost vs food I really am craving for a lot of money.
Being Poor is Expense
Price Discrimination flows a bit into the brick and mortar world. Costco has famously low prices but is locked behind a membership fee, enticing members to spend more, meanwhile keeping those with less means to shop elsewhere since you would need to spend a lot to save enough to cover the membership fee. Walmart has low prices but, there is not a Walmart on every block and those without vehicles have to shop at wherever is close by. Not to mention that just because Walmart is cheap on a lot of products does not mean it's cheapest on all of them. Walmart purposely has more expensive products sprinkled in so that the general low prices will get you through the doors and most people won’t price compare on every item because who has the time or bandwidth to do that. If you don’t have the means to travel to multiple stores you will be stuck paying for those sneakily placed higher Profit Margin items.Profit Margin
Profit Margin refers to the cost of the item compared to the price. For example, popcorn at the movie theater cost the theater very like 0.10 for the bag, 0.35 for the popcorn and 0.25 for the worker to serve the popcorn. Meanwhile they charge $8.75 for a large. Profit margin formula of Revenue - Cost / Revenue would give us 92% profit margin and I felt my costs were estimated to be quite high. For context, 5% is low, 10% is considered normal and 20% is considered high. It is a great strategy to try to only buy items with a low profit margin or even a negative profit margin such as Costco's hot dogs. It actually costs Costco more money to serve a hotdog than they make in money by selling them. This is called a loss leader. Whenever you buy something try to think of how much it cost to make versus how much is it being sold for. If there is a large gap between them, maybe think twice before purchasing. For example, soda is extremely cheap to create, costing pennies yet can fetch $2.50 per drink, up to $9 at an amusement park. Plus a bigger kicker on soda is that everywhere you can buy soda, you can get water for free. Making the purchase 100% unnecessary since no one needs soda to live.
Loss Leader
“A loss leader (also leader) is a pricing strategy where a product is sold at a price below its market cost to stimulate other sales of more profitable goods or services.” Think of printers with ink. The printers are sold at a loss but profit is made up for by the ink. Milk is sold at a loss at Shoppers Drug Mart but hopefully consumers buy high margin items while picking up the milk (which is located at the very back of the store on purpose so consumers have to walk by all the other products). Costco hotdogs are another great example of a loss leader since it costs more than the revenue they bring in.
Grocery Shopping
The best way to buy groceries to avoid the high priced items is to meal plan. Meal planning involves thinking of what meals you want to make for the upcoming week or days before you need to make the meal. As you pick a meal (from a cookbook or other list) you add the ingredients to a list. When all the meals are picked and ingredients tallied simply load up all your favorite groceries store websites to see all the pricing without having to drive to the stores. This will allow you to quickly compare pricing to avoid the high margin items. If you choose to do Click and Collect you can avoid the busy line up at the store and avoid impulse purchases when you are feeling hungry or just want to buy something you see on the shelf.Impulse Buying
Impulse purchase is an unplanned decision to buy a product or service made just before the purchase. This can lead to unplanned spending on your budget and most of the time unhealthy decisions since we rarely impulse buy broccoli.
Spending money has to happen, but your money can go a lot further with a little bit of work and strategies. Remember that businesses want your money and to not fall prey to their sale tactics. If it's not a good deal, don’t reward a business with your money. We all vote for what we want, we just don’t realize it. Make sure to vote for value.
If you found this helpful and would like help budgeting or investing please email me at taylormckeecoaching@gmail.com
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