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  September 23, 2011
Bargain Hunting...

 

Price is what you pay...value is what you get...
-Warren Buffet

Last weekend I needed to go by the $99 store...er ah...I mean Costco to get a special bottle of wine they sell.  As I walked to the back of the store, I couldn’t help but notice the carts passing by me loaded to the brink with 50 lb. sacks of rice, flats of tomatoes, 10 lb. blocks of cheese, 5 gallons of fresh salsa, and sides of beef (I’m exaggerating a bit here...it was only the rib section...so it wasn’t a whole side but rather just the middle 1/3 of a side...) 

I was absolutely amazed at the sheer volume of food heading to the checkout stand. 

As I was driving home, I began to wonder what drives a family to purchase food in such large package quantities.  Are their families really that large?  Are they hosting a large dinner party?  Are they commercial caters?

A few days later, I found myself discussing my recent foray into social anthropology with some friends.  One of those seated around the table agreed with my observations and commented how his wife purchased a lot of their family’s food from a warehouse supermarket only to throw away much of the perishable food several weeks later (they are only a family of three after all). 

He once asked his wife why she continued to shop in this manner (buying great quantities and later throwing away the spoiled food).  Her reply was that the food was so inexpensive at the warehouse store, that even throwing away a portion of the unused food still made the entire purchase a true bargain. 

To me this just sounds just wasteful and not really a bargain at all especially once you add in the additional storage and/or refrigeration.

Are all bargains really such a good deal for consumers?

A deal is only a deal if you truly need or want that product or service.  If not...then it’s really just becomes a waste of money and/or resources.

It’s not just the "big box" stores that offer up the deals.  Manufacturers and retailers have used the concept of the coupon for decades (maybe longer).  The idea behind the coupon is to get consumers to try and use a product or service that they would not ordinarily purchase by offering the purchaser economic immediate incentives.  Manufacturers hope that consumers will try a new product, like the product and continue to purchase the product at full-price.  Many brands have been launched using the free or low-cost offers.

A few months ago, I moved my place of residence.  As I went through my pantry, packing food items, I noticed that there were dozens of old unused items on the shelves.  I wondered whatever possessed me to purchase these items and thought back to the coupon that I may have clipped out of the Sunday newspaper many years ago.  These food items, that were such a bargain at the time, were now being disposed of as the "use by" dates on the packages were long since expired.  They don’t seem like such a bargain now.

Bargain shopping is not limited to food items.  Department stores, furniture retailers, and clothing outlets seemingly have a different sale each week so the "deals" are almost perpetual and ongoing.  Typically, the original prices for their merchandise have been so highly inflated so that they can offer 70-80% "savings" to their potential customers.  

The advent of the Internet and reality television has created an entire subculture of extreme shoppers.  These people are constantly scouring a multiple of sources to find the very best deals. 

Companies like Groupon, Amazon, and restaurants.com offer their subscribers significant savings.  Like supermarket coupon marketers, the actual providers of goods and services are hoping that by offering customers a sample of their wares, they will create awareness and continued patronage by those consumers.  This is rarely the case.

I have a friend who used to own a day spa.  She paid several services, like Groupon and the Entertainment Book, several thousands of dollars to feature her spa in their advertising.  In addition, she offered the consumer a one-time service, at or below her actual cost, in order to entice the consumer to try her spa (for example a 60 minute massage for only $20 whereas she was paying the masseuse $30 per hour). 

After the publication, a steady stream of new customers walked through her door to redeem their deal.  She dutifully recorded their contact information in her database and tracked the repeat business.  After one year, she realized that virtually no one who used the original coupon had returned to her salon despite her best marketing efforts.  It finally dawned on her that the people who came to her spa were now visiting another spa armed with another coupon.  Those people were never potential clients for her spa, they were bargain hunters.

She has since changed her business model to discriminate against those same bargain hunters and create more of an exclusive environment for her clientele.  Her salon is doing much better financially since adopting this model and her existing clients are experiencing a better class of personalized service.

Perhaps it is a reflection of the times, but the notion that a "deal" is a good value just because it carries a low price is nonsense.  A bargain is only a bargain if the goods and/or services provide you with something valuable that you will actually use.  Other times, I’ve paid for an item or service, only to watch it expire and become worthless.

Yes...there are some very good examples of low-cost providers who may give their customers value (think Southwest Airlines or E-Trade)...but they have low prices only because they have commoditized their services into a "one-size-fits-all" mentality (originally pioneered by the likes of Henry Ford who told his potential customers that they can have any color car they want so long as it was black).

A low price doesn’t necessarily guarantee value...value is created when there is actual worth to the buyer.

Thoughts to consider as we do our shopping this weekend... Thank you very much for supporting OptiFuse where we hope to deliver value to our customers...not just a low price.


Jim Kalb
President
OptiFuse
jimk@optifuse.com

 


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