How much would Sir like to pay for that?

Imagine you want a carton of milk. You go to the supermarket and pick the milk off the shelf. You’re in a hurry and the milk is not a big ticket item so you don’t look at the price on the shelf, you just head to the check-out.

At the check out, the assistant asks you how much you would like to pay for the milk. You look puzzled. They explain that you have a choice of paying £1, £2, £3, £4 or £5 for the carton of milk that you have in your hand.  Which would you choose? This seems like a dumb question – given that you are smart and rational and money does not grow on trees, you’d pay £1 right?

Yet as consumers we are invited to pay more for essentially identical products all the time. This is the basis of the smoke and mirrors of the marketing industry.  Even more bizarrely, many of us accept the invitation every day.

Take a look at the 5 cars below. How different would you say these are? Hint: they all look pretty similar to me. Yet the list prices for them vary by up to 100%.

There are some performance / spec differences between them, no doubt, but these are small potatoes in the bigger scheme of things. All have 4 wheels and an engine powerful enough to do 100mph. I find that’s usually plenty.

passat

The Escape Artist is no expert on cars but I did some research and it turns out there is a good reason why these cars all look similar. All the brands are owned by Volkswagen, the company which has lead the global car industry in using what are referred to as common product platforms.

jettaVolkswagen realised it was very expensive to make lots of different models with different specifications.  This created complexity and meant higher cost and lower profits. They came up with a platform strategy to allow them to target more market niches and consumer segments without the cost of creating entire new cars for each.

skodaYes, there are just enough differences in specification and components to “justify” putting different badges on the front of them.

But lets be honest, the cars are almost identical for practical purposes. Other than the badge, the key difference is the price tag.

audi2

Volkswagen have cleverly created a stable of brands that allow similar cars to be sold at very different price points to different people.

All car manufacturers do this to some extent and it makes perfect sense for them.

Seat 3This allows them to maximise profits via price discrimination.  Price discrimination is perfectly legal – its just selling the same good to different people for different prices based on their differing willingness to pay. This is why suckers pay more for the same shit.

Volkswagen realised that people like to choose….colour, engine size yes, but also how much they pay…even for similar products.  Price is not independent of the consumer’s perceived experience, it helps shape it.  This is what the advertisers of Stella Artois were getting at with their classic Reassuringly Expensive tagline.

When we bought a car, we started off looking at A4s as Audis seemed to be for people that wanted to show off a bit less than BMW owners. We visited various dealers and noticed that Audis seemed to be more expensive than other cars that didn’t look that different. One of the dealers employees let me into the “secret” of the modular platform strategy and that the A4 had a number of close relatives, all of which were cheaper.

This blew my mind.  Here was the truth about consumerism hiding in plain sight: same shit, different prices. The Emperor had been revealed as wearing no clothes, yet even though the “secret” was out there, everyone else seemed to be carrying on regardless.

For me, this was one of those lightbulb moments on the road to FI when I realised it was possible that the conventional wisdom could be wrong and that people can be repeatedly irrational.

In his book Predictably Irrational Dan Arriely reveals research that shows how people who have paid more for wine, consistently report that it tasted better.  In other words, what people think of as the direction of causation (a better tasting product fetches a higher price) is reversed.  So a higher priced wine tastes better to most people….but only if they are told beforehand that it is expensive. Crucially, those same people do not prefer the more expensive wines in blind taste tests.

In standard micro-economics, this situation is assumed away – like a rabbit made to disappear with a magician’s wand.  Consumers are assumed to be rational, unbiased and well informed economic agents that compare the utility of the good with the price.  If offered a choice between identical products, the rational Vulcans all choose the lowest price and competition ensures that The Law of One Price holds. Unfortunately for economics theory, here on planet Earth this bears no relationship to how species of apes (such as humans) choose cars.

Imagine a hypothetical situation where a type of ape has evolved from living in trees to living in modern complex urban societies.  The Monkeys all choose different specialisms within their society.  Some specialise in car design, some in applied nuclear physics, some in welding and some in reading the news or Tarot cards.

Lets assume that 1% of the Monkeys specialise in car design and technology. These Monkeys know a huge amount about cars.  The remaining 99% know fuck all about cars.

That 99% can then be divided into 2 groups.  Imagine half of the 99% know nothing about cars but they like to pretend that they do. They care about social status and what the other half of the Monkeys think about them. Let’s call this half “the males”.

Now imagine that the other half of the 99% know nothing about cars but they do care about resources and social status. Let’s call this half “the females”.

In this purely hypothetical situation, the Monkeys are given lots of bananas every year.  The Monkeys can exchange their bananas whenever they want to get other goods and services.

Each Monkey is given a different amount of bananas each year.  The differences in annual banana income can be significant and are partly based on logical reasons such as the skill and work output of the monkey. But the differences are also influenced by other apparently arbitrary factors like where the Monkeys live, their height, facial characteristics and their willingness to groom and eat the fleas off the bigger monkeys.

Whatever the reason, the Monkeys can get very worked up by banana allocations. So the Monkeys have a social convention that they don’t talk openly about bananas.  And they store their bananas out of direct sight of the other monkeys.  They have underground banana banks, online banana markets and rental trees that allow them to store the bananas in a way that is mostly invisible to the other monkeys.

Now the 99% of the monkeys that know nothing about cars would like all the other monkeys to think highly of them. The monkeys do like bananas and have evolved to find monkeys with lots of bananas attractive. But Monkey Etiquette dictates that it is bad form to disclose the number of bananas that you own, for example at tea parties.

The monkeys are ingenious and they look for ways round the social rule against disclosing their banana stash. So they learn to swap their bananas for stuff that they can publicly display that gives clues to the other monkeys about their banana stash and banana earning ability.

Cars are big, visible and expensive. All the monkeys have a rough idea of how much cars cost and, if they are so inclined, they can look up the prices on the Monkeynet (a bit like our internet but with less pornography).

Best of all, the cars offer plausible deniability.  This means that the monkeys displaying the expensive cars can always deny that they bought the cars to show off.  The monkeys are able to solemnly swear that they bought their cars based on real practical reasons.  They keep a straight face whilst saying things like “It has a big boot so I can fit in all my climbing tyres inside”.  Sometimes the monkeys even believe this themselves.

To cut to the chase, we didn’t buy the Audi A4.  We bought the Skoda – the cheaper version of the platform – by then a fantastically engineered car but whose brand remained “tainted” by the overhang from communism.  This felt like the shopping equivalent of value investing to me – low price, high yield, more for your money.  The Skoda was several thousand pounds cheaper than the Audi and the difference went into the Freedom Fund.

What were the downsides?  I am struggling to think of any.  We’ve owned 2 Skodas and neither of them has ever broken down. The running costs have been very low.  I was not ostracised.  I never missed a promotion at work because I owned a Skoda.  I never needed extra horsepower to outrun the police.

Yes, a couple of my friends gently pulled my leg about driving a Skoda.  But this was about as traumatic as being savaged by a pack of spring lambs.

Car 1: VW Passat – new from £22,215

Car 2: VW Jetta – new from £18,150

Car 3: Skoda Octavia – new from £16,525

Car 4: Audi A4 – new from £27,600

Car 5: Seat Toledo – new from £14,265

 

30 comments

  1. Blimey. I never knew Skoda and Seat were owned by VW. And I’m a guy 😉 But then I’ve never bought a new car in my life. I just couldn’t bring myself to do it.

    Economics does have a classification for goods where the demand rises with price – Veblen Goods after Thorstein Veblen’ caustic deconstruction of capitalism and conspicuous consumption The Theory of the Leisure Class – written in 1899. It’s on gutenberg and still holds 🙂

    1. Thanks for the Veblen reference. By co-incidence I recently dipped into Veblen’s book as it was recommended by Geoffrey Miller who is fantastic on the evolutionary drivers for spending…I confess I found the nineteenth century prose tough going…I may need to try harder!

  2. TheTurnaround · · Reply

    Another fantastic article, TEA. I loved this paragraph:

    “Yes, a couple of my friends gently pulled my leg about driving a Skoda. But this was about as traumatic as being savaged by a pack of spring lambs.”

  3. I bought a used 2003 Audi A6 back in 2004. Before I solidified my escape plan. It’s got over 120k miles on it now. I’m shooting for 200k. And then I’ll get a used Skoda. Although I haven’t seen one in the US.

  4. eromgiw · · Reply

    I usually buy cars at 5-6yrs old for about 1/3rd of the price new and keep them until they become uneconomic to repair. My last car, Saab 9000, got to nearly 250k before being written off. Current car (another Saab) is now 14yrs old and barely run-in at 160k. While I accept that the various VW brands are all basically the same car underneath, there will be a difference in the quality of the paintwork, rust proofing, interior and the myriad switches and electrical items. Whether these justify the premium for the more expensive brands is debatable. There is an argument, however, for buying a higher quality item that will last 20yrs instead of a cheaper item that is unreliable and has to be replaced every say 8yrs.

    1. Don’t work that way. Any VW group plant could be making any VW group car. Check out Wackypedia for more details – http://en.wikipedia.org/wiki/List_of_Volkswagen_Group_factories

      One example, the ex-Skoda works in Bratislava also makes Audi Q7 and Porsche Cayenne. I bet the fit and finish is as good as Leipzig or Neckarsulm.

      1. Just because they’re made/assembled in the same plant doesn’t mean they’re built to the same specifications. Paint is expensive and the type, number of layers and thickness of the layers will vary from model to model. See this, Skoda and Audi use different clearcoat hardness for starters:
        http://www.theultimatefinish.co.uk/car-care-blog/detailing/paint/

        And are you saying the interior upholstery, carpet and dashboard are the same spec in an Audi and a Skoda because they’re made in the same factory?

    2. out of interest, what price range do you aim for, is there a max mileage rule to consider when looking at 2nd hand?

  5. An interesting read. I’ve only ever bought one car. I went for what they refer to as “boringly reliable” in the car industry: a Mazda 6 estate. Huge boot capacity which with 2 kids is VERY needed for our camping holidays.

    In a sense I timed the market well on this purchase: bought during the recession with Mazda doing huge promotions to keep their turnover moving along – 20% off list price. Looking at the current prices of Skoda estates I did well i think – for the same engine size the Skoda’s cost a few grand more.

    It’s just over 3 years old & only has 15,000 miles on the clock…. i’m doing my best to cycle more miles than i drive this year. Last year I only managed 3,000 miles on my bike due to being on crutches for 6 weeks. Shooting for parity around 4,000 miles on both car & bike this year!

    My aim is to own the car a long as it is economical to do so.

    The question i ask myself is “Would i buy a brand new car again”. Maybe not, as I can see the economic folly in doing so, but it’s assuring to know the engine hasn’t suffered past abuse. The last thing i want to do is break down with 2 kids in the back.

    1. I love the bike : car mileage parity idea LCIL!

  6. Your writing keeps getting better. Enlightening and very funny at the same time

    1. Thank you! please pay it forward and send the site link to a friend

  7. Brands can be quite powerful things, preying on the trust or ignorance of people without them even knowing it.

    I once was dedicated to a certain brand of TV/home entertainment system, but now I see stacks of brands with good quality products and track records of reliability at far cheaper prices, so I don’t really care that much about it any more. It’s a shame I didn’t come to that realization before I bought lots of their products at premium prices!

    Oh well, my interest in TV is quickly diminishing so I probably won’t buy another one for a long time anyway!

    1. eromgiw · · Reply

      Yes, when it comes to electronics and hifi in particular, there’s an awful lot of brand hype, triumphs of style over substance. Bose were especially good at this. Don’t get me started on mobile phones… why anyone would fork out for an iThing beats me!

  8. bestace · · Reply

    If the cars are all much of a muchness, why didn’t you buy the Seat Toledo and save a further £2,260 for the freedom fund? By opting for the Skoda, have you not just volunteered to pay £2 for the carton of milk?

    1. Well spotted and great question. We bought the Skoda (rather than the Audi A4) several years ago now. Back then I didn’t even know Seat was part of Volkswagen and didn’t consider it. I only found that out researching this article.

      Although the Skoda was better value than the Audi, I’m not saying I made the perfect decision back then…this blog aims to share any screw-ups as well as any successes so that readers can do better than I did.

      The list prices are bang up to date to illustrate the situation now and help any readers in the market for a car. I’d definitely check out the Seat as well as the Skoda if I was looking to buy now…

  9. John of Hampton · · Reply

    I have found that one of the biggest contributions to my financial well-being is that I am not a car-snob. My previous car went 279,000 miles, and would probably still be going today if someone hadn’t driven into the back of it… It amazes me that so few people seem to know about this simple 3-point method of saving money on motoring: (i) always buy second-hand, (ii) go for economy and reliability, not sex-appeal, and (iii) drive it into the ground.

  10. sparkle bee · · Reply

    Love this article. Plenty of car brands using the same platform now. Ford are behind a number of brands although they have been selling up or closing brands.

    When I had a company car, I didn’t bother too much, just used to look at the tax band but I am now back to having my own car. So it’s back to cash purchase, second-hand car, economical and run into ground until costs to repair are prohibitive then go out and get another one.
    I ignore those who have a go at me over my car choice. It’s reliable and economical to run and am not so precious as they are over every scratch, personal number plate or any other customisation they have to show their status anxiety and ‘wealth’.

    1. Exactly Sparklebee…nice Status Anxiety reference buried in there as well!

  11. Wooooah hang on a minute… you bought a NEW car?!?!?! 😉

    Yes it occurred to me years ago that people like to pay more for the same thing. It’s bitter sweet to see that backed up by research from Dan Ariely et al.

    Sweet because, well I guess I was right.
    Bitter because:
    1. Certain people I know are car/wine/*insert consumer item here* snobs and I would sometimes love to shove this article up their *insert bodily part here*
    2. It kinda just makes me a bit sad that this is a common human trait (and I am no doubt unsusceptible to it completely)
    3. I too occasionally get gently ribbed for owning non luxury branded products. Like you said, it’s water off a ducks back for me in general terms, I have thick skin and enjoy “a bit of banter”. But the one thing that does annoy me about it is that they actually believe it (again as shown by research you mentioned)

    Finally I think the Monkeynet would have vastly more porn than the internet, the dirty little buggers!

    1. Thanks TFS, you raised 2 important points which I want to respond to:

      1. The Monkeynet has LESS porn than the Internet. The Monkeys spend less time in the office and have more real sex than humans. So they have less use for the fake stuff.

      2. Yes – you got me bang to rights- we did buy a new Skoda back then but I am older and wiser now….our current one we got second hand (although as good as new).

  12. £27,500 actually made me snort, I had no idea you could actually spend that much on what just looks to be a generic car.
    After so many car related disappointments in my formative years, (arriving at work late, covered in grease, battery acid holes in my overcoat) I loathe all the bastards equally and so bike exclusively given the choice.
    In fairness to the manufacturers if you are in the market for a new car (particularly leasing) you are fair game, same goes for household appliances. However the same bs seems rife in food and clothing but you only get a glimpse of it through manufacturing and supply ‘scandals’ and that is just wrong.

  13. pjeast@xtra.co.nz · · Reply

    Hi TEA,
    Thanks for your thought provoking articles.
    Sunday morning here in NZ, and we’ve just got back home from collecting walnuts and figs from pathways around Tauranga. Yes we drove there – but the car is a 10 year old jap import and only has 10000kms on the clock. we’ll run this into the ground and then replace with another jap import. our other car is a 1998 subaru, great with 3 young children, but no longer needed so we’ll flog it soon.
    Fortunately cars here don’t rot away so quickly – to have 20yr old car is not uncommon.

  14. Rowan Tree · · Reply

    Hi TEA,
    You’re so right about Skodas! A few years ago, I had a Skoda Octavia and my husband a VW as our respective company cars, and when vacuuming them, I could not tell which car I was in! They were identical inside! (We loved the Skoda the most by the way, but they were taken off company listings).
    As my husband is planning his Great Escape, he now has the cheapest, most financially wise car on his company’s list – an Audi A3! Sure, it is comfortable for the many miles he does, but it is designed for spendy people – cupholders for expensive take away coffee only (nowhere flat for your flask, mugs and picnic). Also as I’m the chief car cleaner, I can tell you it is designed to trap dirt everywhere; it’s the most time consuming car I have ever cleaned! I guess A3 drivers must pay their minions to do it for them while they are in the expensive cafe. Roll on the final escape!

    1. Thanks! Great comment….its very revealing that you couldn’t tell which car you were in…that says it all much quicker than my lengthy article.

  15. themerrymiser · · Reply

    Great article…food for thought

  16. It’s the same car… for different prices… with a few bells and whistles tagged on.
    *Mind blown*

  17. Dear Escape Artist – thank you for sharing your experience and also the value in this lesson, and in such a comical way. Your posts are getting better and better, please keep them coming.

    When I review the monthly expenditure and compare to the budget, transport costs are right up there near the top. The biggest line item is food and this can be highly discretionary and much more able to be flexed. Transport is a little tricky, once a car the lease is signed or the purchase made you are fully committed. The ideal is of course to solve the problem of transport first, but if you need it then buy the most effective tool for the problem to be solved.

    One of the next biggest line items is insurance. Hate it – every bit of it – from every angle.
    Partly this feels higher living in the US than when we live in the UK, but the total insurance nut is always a killer. Similarly it is more binary – you’re in or your not insured. The internet has helped compete some costs out of premiums but it still feels like an expensive cartel.

    Before meeting FI what is the wisdom on any form of Life Insurance / illness cover?

    1. My approach to insurance is simple. If its legally compulsory (eg third party motor insurance) or covers me for a huge risk that I couldn’t bear myself (eg house structural insurance) then I get it. If not, then I don’t bother with it. For example, I don’t bother with contents insurance because I could replace all my possessions cheaply and quite easily. I don’t bother with life or critical illness insurance because that’s what the stash is for.

      The trouble with insurance is that you are bearing the costs of lots of fraudulent claims and insurance industry cubicle dwellers. Better to “self-insure” and invest the premiums saved where possible.

      This is my approach in the UK. If I was in the USA, I would however get health insurance….I’d start by looking at what policy MMM uses…

  18. Patty · · Reply

    Another lovely post! Reminds me of a quote once seen on Facebook “Retail therapy! Now I’m lonely AND wearing an expensive shirt. ~~????”

    Seems it would make much more sense to solve the original problem, eh?

    Transportation – 1)a way to get from A to B or 2)a way to pizzle up the neighbor’s pant leg to color him pea green with envy? My frugalista gene and the Millionaire Next Door way is 1. A to B baby! We’re laughing all the way to the bank.

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