Buying Value, not Price

Cross-posted from Pu­tanu­monit.

Fol­low-up to Shop­ping for Hap­piness.

My old Galaxy smart­phone re­cently gave up the ghost, and I up­graded to the new model for $750. My friend was sur­prised when I told him. The old model is now available for $250, is the new one re­ally three times bet­ter?

“Three times” bet­ter can mean sev­eral things, but in my post on spend­ing money wisely I came up with the met­ric that should guide pur­chas­ing de­ci­sions: hap­piness gained per unit of time spent ex­pe­rienc­ing a thing, or :-)/​hr. By this met­ric, since the new phone costs 3x as much, un­less it pro­vides 3x the :-)/​hr it’s worse in terms of $/​:-). That means I’m get­ting less hap­piness per dol­lar spent.

I like my new phone a lot: the screen is big­ger, the bat­tery lasts all day and night, I can use it for blog­ging. It brings me at least 25% more :-) than the old phone. But, it doesn’t make me 200% hap­pier. And yet I feel like I’m get­ting a good deal.

When my friend asked how I would jus­tify this de­ci­sion I warned him not to trust my ex­pla­na­tion – since I already bought the phone, any jus­tifi­ca­tion may just be a post hoc ra­tio­nal­iza­tion. That caveat aside, my jus­tifi­ca­tion is that the price of the phone is a red her­ring. What I re­ally care about is the value.

Ask your­self: how much would you be will­ing to pay for your smart­phone if it was the only model available for sale?

Whether they “ru­ined a gen­er­a­tion” or not, but I think that smart­phones are awe­some and im­mensely im­prove my life. If I had to choose be­tween no phone at all or a Galaxy smart­phone, I’d pay at least $4,000 for the old model and $5,000 (25% more) for the new one. That means I’d be will­ing to pay $1,000 more for the up­grade, and they only charge me $500 more ($750 vs. $250) for it. The fact that smart­phones cost less than what I’m will­ing to pay is just a won­der­ful bonus born of en­g­ineer­ing in­ge­nu­ity and mar­ket com­pe­ti­tion.

I square this with the $/​:-) dis­par­ity by not­ing that my goal is to max­i­mize :-) over all the money I spend, not in each cat­e­gory sep­a­rately.

Con­sider a toy ex­am­ple of a world in which only two product cat­e­gories ex­ist: jack­ets and smart­phones. You have $1,000 to spend, and four prod­ucts to choose from:

  1. Galaxy S7, $250, 4,000 :-)

  2. Galaxy Note 9, $750, 5,000 :-)

  3. Reg­u­lar jacket, $250, 500 :-)

  4. Fuck­ing jacket, $750, 1,000 :-)

Given the con­straint that you can only en­joy one smart­phone at a time, the most hap­piness is bought by pur­chas­ing the Galaxy Note 9 and a reg­u­lar jacket – 5,500 :-). The S7 does bet­ter in terms of $/​:-) but it doesn’t leave you with great op­tions for the re­main­ing $750. It’s bet­ter to spend more on cat­e­gories of prod­ucts where you get a lot of :-) and spend the min­i­mum in low-value cat­e­gories in­stead of look­ing to op­ti­mize within each cat­e­gory sep­a­rately.

This ex­am­ple is not too far from the real case for me. The fact that I’d be will­ing to pay ~10x the ask­ing price for a smart­phone is a sign that smart­phones (along with soap, tea, and un­der­wear) are high-value cat­e­gories. If I have enough money to buy great things in each of those I should do that be­fore look­ing el­se­where. For things that I value lit­tle com­pared to their av­er­age price (cars, jew­elry, whiskey) even a good within-cat­e­gory deal is a bad deal over­all.

De­com­pos­ing Value

One more thing to con­sider is that the value of a pur­chase is made up of sev­eral fac­tors. Mar­ket­ing the­ory usu­ally breaks those into four types:

  1. Func­tional value – the di­rect use of a thing, the prob­lem it solves. The value of a spoon is mostly func­tional.

  2. So­cial value – the con­nec­tion with other peo­ple and the sig­nal­ing value of the thing. The value of a col­lege de­gree is mostly so­cial.

  3. Psy­cholog­i­cal value – the hap­piness re­sult­ing from merely hav­ing the thing. The value of a framed fam­ily photo is mostly psy­cholog­i­cal.

  4. Mone­tary value – the fi­nan­cial benefit gen­er­ated by own­ing or re­sel­ling the thing. The value of stocks and bonds is mostly mon­e­tary.

Com­pa­nies use this break­down to mar­ket product to con­sumers, but as a con­sumer, you can flip this around to figure out what you’re look­ing for and how much it’s worth. For ex­am­ple, I can de­com­pose the value of a tai­lored suit:

  1. $50 of func­tional value – keep­ing me warm and not-naked.

  2. $2,000 of so­cial value – a re­quire­ment for cer­tain jobs and so­cial events.

  3. $300 of psy­cholog­i­cal value – I feel like I look good in it.

  4. 0 mon­e­tary value – no one is go­ing to pay much for a suit tai­lored to some­one else.

This means that I’d be will­ing to pay up to $2,350 for a good suit (thank­fully, I can find one for a frac­tion of that price), but I won’t pay much ex­tra for a suit that is slightly bet­ter look­ing for me or does a bet­ter job of keep­ing me warm – most of the suit’s value is so­cial.

In rich coun­tries, peo­ple tend to spend a lot more money on so­cial value than on other kinds. Mak­ing me warm in New York costs a lot less than mak­ing me cool.

For an op­po­site ex­am­ple, I al­most always buy the cheap­est overnight air­line tick­ets I can find, even if an air­line with great food and ser­vice costs only 10% more. The value of a plane ticket to me is al­most purely func­tional – get­ting me to an­other city. I don’t care to pay more than $15 for an in-flight meal, let alone hun­dreds of dol­lars for busi­ness class or more po­lite flight at­ten­dants.

Ad­vanced Pu­tanu­monit users don’t have to limit them­selves to the four types of value de­scribed above. You can goal fac­tor any pur­chase and break it down to your per­son­al­ized com­po­nents of value. And af­ter do­ing this ex­er­cise, truly ad­vanced and en­light­ened users may de­cide not to spend their money on any­thing ex­cept peanut but­ter. Un­for­tu­nately, I’m not there yet.