Financial Daily from THE HINDU group of publications
Monday, Aug 09, 2004
Columns - American Periscope
After all, you get what you pay for
Therefore, if you buy the cheaper product, you should not complain because that is what you paid for. Thus, our expectations of the product are to be adjusted to the price we pay.
As with all such adages, there must be a sackfull of caveats that should go with this adage. With increasing competition, manufacturers realise that consumers expect a basic minimum need to be satisfied by the product, irrespective of the price. Thus, the toaster will have to toast the bread, whatever the price. Moreover, customers begin to expect a minimum quality. If you are a low-cost manufacturer of generic toasters, and your toaster toasts poorly, you will be out of business very soon, whatever your cost advantages.
The spring may stick and one may have difficulty taking the slice out of a cheaper toaster, but when all the pieces out, they should be toasted. Of course, some may be burnt because the thermostat may not function too well! The higher price you pay for another toaster would not only ensure that the slice slides out gracefully, but the appliance adds to the aesthetics of your kitchen. But, at a minimum, no toaster will burst into flames causing a fire in the kitchen.
Catering to expectations
Manufacturers of some appliances have made a business out of catering to the expectations of the customers. There are different levels of warranties that you can pick from, which cover only parts, or parts and labour, for three years or five years, and so on.
So you can pick the one that is appropriate for the level of acidity that you can tolerate in your stomach out of the stress that you experience not knowing whether the machine will never breakdown although you paid for a lifetime warranty.
If we twist the adage around, we can say ``You should pay for what you get". What this would mean is that you should not expect to be a free loader. If you receive services or goods that you have not paid for, then somebody else is bearing the cost in greater proportion to the benefit being received.
The farmer who receives free power, thanks to the generosity of the Chief Minister of Andhra Pradesh, is able to do so because urban consumers, or industrialists, are paying a higher price for the electricity than they otherwise would. Alternatively, citizens may be stuck with poor schools, or bad roads, because the money has been diverted to meet that portion of the cost of generating and distributing electricity to the farmers that is not being recovered by the price for it. As the other American adage goes, ``There is no free meal". Improper pricing leads to misallocation of resources as it sends wrong signals. If power and water are free, not only would the farmer not mind wasting it, but would end up planting crops that need more water even though that is not the most efficient use of the land in that area.
When the price of education is kept artificially low, it sends a wrong signal to the students. They tend to value it lower. German universities are faced with a perennial problem of students who extend their stay in the university taking the benefit of free education, due to the difficulty of finding a job.
Sometimes, when a good or service is included as part of a package, there does not seem to be any guilt arising out of misuse. The notion of waste does not even enter the mind. Have you seen people piling food onto a plate and wasting much of it because they have already paid for it? Buffet meals are often called ``all-you-can-eat'' but that does not mean all you can waste. Hotel guests feel that they have to use a fresh towel every morning just because it is provided, even though they may stretch the same one for at least a couple of days back home. Hotels have become a little smart about this these days.
There is an environmentally correct sign that says the hotel is interested in water conservation and if you do want a fresh towel, please leave the used one on the floor, otherwise it will not be replaced. The same goes for the little soap and shampoo that is offered. It is usually half used and the rest is wasted although some hotels I have been in Japan have started keeping soap dispensers instead so that you will only take what is needed.
When you do not pay for what you get, you tend to devalue the product. That is because, there is no value attached to it, which is what is represented by the price. The same is true of free advice. The receiver nods and thanks you for your pearls of wisdom and they are promptly forgotten.
Doctors and lawyers are often hounded in private social gatherings by free loaders who would corner them with a query requesting a professional opinion. A good strategy would be for the giver of the advice to go home and send a bill to the receiver ``for services rendered". While invitations to parties may drop, you can have more leisure, and enjoy the few parties that you do attend.
If we take this discussion to the level of public policy, how does a `populist' government help weaker sections without giving them handouts? Put more simply, how does one make the receiver realise the value of the good or service being received? One way is to not make it free but attach a process of discounting with it. Thus, you could make the recipient pay the full price and submit the bills for reimbursement from an agency. The serious problem with this approach is the bureaucracy that gets created to manage the refund or reimbursement process which would significantly increase the cost of the subsidy being given. In the case of education, rather than an artificially low price, a system of grants and subsidised loans to the needy results in fewer distortions.
The system of food stamps widely used to help the weaker sections in the US gives you the coupons ahead of time and allows you to use it as equivalent of cash in any store for a specified list of goods. This is a less costly way of achieving the same.
Ration shops are another mechanism to seek to control delivery of some commodities to those who are eligible. The logic is peculiar. If you are prepared to put up with the bureaucratic hassle of getting a ration card and putting up with the poor quality of products, you probably need help from the government. After all, you get what you pay for!
Matching grants are another wonderful idea of making recipients realise the value of what they are getting. Instead of building a new school in the village, you tell the village residents that you will match `x' amount for every `y' funds that they raise. This will sharpen their focus into making sure they get only the amount they need, and keep them watchful that they derive the benefits from the amounts they have invested.
(The author is professor of international business and strategic management at Suffolk University, Boston, US. His Internet address is email@example.com)
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