Handling Finances

In many commodities, prices move fast. Sometimes when a technology moves fast as with computer speeds and capacity, a new, better product is released every couple months and the prices of last month’s release will drop dramatically. Marketers take full advantage of this and push companies to release numerous small upgrades rather than simply targeting the best possible product every year or two. This way, consumers who are “early adopters” and tend to purchase the best will be repeatedly pressured to shell out top dollar for the newest and greatest. Similarly, those of us looking for a bargain will constantly see prices dropping dramatically and feel like we’re getting a great deal.

In reality, marketers are adjusting pricing to get the largest profit they can, so we’re not getting some great deal at their expense, but there’s usually a sweet-spot that offers the highest performance (or latest features) at the best price. Of course it’s not always just a marketing ploy, often making something larger or faster is challenging and it can take months for a manufacturer to learn how to make a new version for a lower price.  I like to call this sweet spot the “value elbow” because you can find it by looking for a bend in the graph of price vs. performance.

Looking for the best value (lowest price per performance/capacity/weight) is a good idea in all areas from grocery shopping to buying a car, but when technology and prices move fast, there’s generally a good reason to get the best performance possible. For example, if you’re shopping for a computer, you don’t want to buy the cheapest one you can find because it won’t run many of today’s programs. At the same time, you don’t want to buy the most expensive computer because you’re paying a huge premium for the latest, hottest components.

Graphing price vs. performance.

Again, this works for a lot of fast-moving commodities, but I’ll focus on LCD computer screens as I’m a bit of a nerd and follow LCD displays rather closely.  To get a good comparison as an example, I chose just Acer displays from BH Photo Video.  The technique can work with a variety of brands at multiple vendors, but it’s sometimes difficult to differentiate between the different features and quality of different brands.  I chose to graph simply the size of the displays, but again, the technique can be used for a variety of different features.  To the left is the graph of cost vs. screen size of the Acer displays.

Circled in red is the best value for the money.  At this point, you can get the biggest screen (or whatever metric you’ve graphed) for the same price per area as smaller screens.  At this point, you’re not paying to be an early adopter or paying the manufacturer extra while they learn how to make these larger screens at a lower cost.

Be careful not to buy into this value elbow just because it exists!  In some cases (as with computers in my opinion) buying at or near the value elbow really is the best deal since the product becomes obsolete so quickly.  In other cases (as with flash memory for my camera) you might be able to purchase a much cheaper card that will never become obsolete because your camera will never ‘need’ a larger card (as long as you don’t upgrade your digital camera anyway).  Finally, there are times when you might really need a feature or capability on the expensive side of the value elbow.  Consider carefully whether you can wait for the price to drop — if an even newer version is scheduled to be released in a couple of months, it might be worth the wait until the product you want drops back into the value elbow.

This technique will never tell you which product to buy, but it can be useful to let you know which products are being priced higher just because they’re new.  If the latest gadget is important to you, and you can afford to pay the premium, the most expensive item might be worth the extra price.  On the other end of the spectrum, if you only intend to use your computer for email and basic web surfing, buying a computer at the value elbow would be a silly waste of money — you should look for something much cheaper that will meet your needs.

This entry was posted on Wednesday, March 26th, 2008 at 8:03 pm and is filed under Saving, Spending. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.