Monday, 24 January 2011

Economies of Scale?

Today I'm going to bang on about relative scales of budgetary tightness. It's a phenomenon I have noticed over the past few years, and one that has been brought to light in particular by a comment I heard today. I think it is easiest to explain by means of an example what I mean:

If you're buying a house, people move prices up and down in the thousands. So a bit of a move in the market and Johnny Estate Agent proclaims the asking price for the house you're looking at has gone up £5,000 or £10,000. No-one bats an eyelid. Once you're up over £200,000 (and I'm talking London prices not UK averages so it's a perfectly reasonable price to discuss), we deal in big numbers. Big. And we're fine with it. No-one puts a house on the market for £273,425. Maybe £275,00, but once we go above £300,000, we only deal in £10,000 multiples.

Then you buy a second hand car, and you might be in the £10,000 region. You'll probably look to get a bit off. You'll feel quite good about yourself if you get it for £9,000, and not too bad if it's £9,700 after the dealer insists it's a bargain.

When you buy a new washing machine, you wait for the January sales if the old one can last that long. Then you can get a £400 one for £300.

When you're in a restaurant, you feel comfortable ordering a bottle of passable Rioja for £20 that retails in Oddbins for £7, but you'd feel miffed if the same bottle was the cheapest on the menu at £24.

Now the obvious link here is percentages - this much hasn't escaped me. It is the idea that if you have got a certain percentage off, it was a good investment. Whether or not you really needed it, or whether it was correctly priced in the first place is rather a secondary consideration. I believe this is the entire idea behind the January sales.

However, what still escapes me, is how the same person can make all the above transactions in a year and only concentrate on the percentages. The £300,000 house moving up to £310,00 is a 3.33% price rise. The discount on the car from £10,000 to £9,700 is 3%. The January sales washing machine reduced from £400 to £300 is a 25% discount. The more marked up Rioja from £20 to £24 is a 20% increase.

Ultimately it all comes out of the same bank account. Just because the numbers are bigger with the house, so the percentages smaller why consider each £1 more you spend there any less important than on the car transaction? If there was a small scratch on the rear bumper you'd be asking for £100 off, so why only deal in £1,000s or £5,000s on the house. That said, if one of two similar washing machines was £30 dearer, that would probably make your decision for you. So maybe the scratch on the car should be £130 off, or £70 off? But then if we can go one way or another for £30 on the washing machine, what's £4 on a bottle of wine? Yet people get tighter the smaller the amount of money involved, yet when you talk about large chunks of their life savings, they willingly spend like a Labour Government in a pre-election budget.

I'm not saying it is wrong that people deal in larger numbers as the asking price of the item increases relatively. I just find it interesting that even when it's all coming out of the same pot, the same person who bought the house for £10,000 more than he was planning and didn't really mind, who just bought a plate of £3 chips he didn't eat, still won't buy an iPhone app he really wants for £1.79, because "it's a bit expensive"...

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