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