Sharing Daily Discoveries About Personal Finance And Business Topics

Threshold Limits In Seeing Others Gain and Profit

My uncle contacted me today as he was interested in purchasing a 55 inch LED TV and saw a great one at a store he was in. The price tag was $4999.99 and apparently the salesman offered to knock it down to about $4699.99. As well, he started to offer all of these accessories and add ons as well for what seemed to be 80% off the retail price. Sure enough, the person tells him that is the best he can do as well.

As usual, he contacts me to see if I knew whether or not it was a good deal price wise as one of the factors he was thinking was that retail sales have been bad for companies and so maybe this truly was a good deal. When he told me the prices of the add-ons they actually sounded decent to me. But for the TV itself, I had to contact other people within my network.

In general though, he didn’t care too much if there was only say a $200 to $500 markup. He is a business person himself too and understands that a company needs to make a profit. In fact, he was even telling me that even if it was say cheaper online or at a different place he would factor in other details like the shipping as well.

It just so happens that I knew a person that worked for this particular company and as a result he can get everything at a discounted price. With the information that was given to me, it looked like the cheapest that one could get it for was about $3700. An extremely substantial difference no doubt.

So after relaying this information, I found out that he was already kind of reconsidering holding off as a result of the new stuff that is coming out, but knowing that the company would make almost $1000 for that single purchase made him not want to buy it for sure. He made that pretty clear too as he didn’t feel it was right for a company to be making that much money on a single transaction.

Psychological factors like these always interests me when it comes to money. It’s especially useful to know too if you are say even trying to do simple things like making a side income from some kind of venture. I wrote an older post before called Because You Have Something To Gain which kind of dives into this realm.

In general, for myself I’d say a 20% profit margin is usually “fair” when it comes to reselling items when factoring everything such as the person’s expense and labor. But I guess the question is does the same hold true if say an item costed a company $100,000 to acquire and they then sold it for a $20,000 profit? Would I be okay with that? Even I’m one to say I would be bias in saying not really.

In some ways it is kind of silly too when I think about it as many things like say a membership or a professional service fee is technically “marked up” according to what the provider thinks it is worth. In that situation, you mostly compare it based on value and not so much on how much of it is profit for them. But knowing that this is an issue for people means it is definitely something that you have to put some thought into when it comes to your ventures.




3 Comments to Threshold Limits In Seeing Others Gain and Profit

  • A few things occur to me about this.

    $1000 ‘Profit’ on a $5000 sale ? hum, 20% doesn’t seem unreasonable. Is the psychology here, not the actual transaction, but that the numbers are big?

    Years ago my Dad sold flowers. His pricing was double the cost and then add a %. A Dozen Roses might cost $2, he would sell for $5. That still put him below his competitors and he sold a lot.

    Whether it’s TVs or flowers there are lots of things that come out of the price you pay – all sorts of overheads, but that’s not why I wanted to comment.

    Whether it’s $3,700 or $5000 most people can’t pay cash for that, so they finance it. Frequently through the store. The TV may well have cost the store $3,500 themselves, but they can still make money on the finance. The big furniture stores are famous for this. Not so much furniture stores as loan providers using furniture as an in between mechanism.

    Shoppers, generally love all this. You can fill your house with furniture and TVs and frequently not pay for 12 months. When you do have to pay, the vast majority is interest and you never get to pay it off. After all, next year you will want a $10,000 TV right?

    Personally, I feel this has contributed to the financial crisis. Too many people over extending themselves when credit was easy to get, but it’s all relative I guess. As a culture, we seem incapable of showing restraint, so whining about a boom and bust cycle seems rich.

    Stewart 1/13/2009 1:15 pm
  • That furniture store you speak of sure sounds like The Brick. That is a very interesting line too on how you mentioned they are “Not so much furniture stores as loan providers using furniture as an in between mechanism”.

    I wonder if there is any business that literally started its operations with that mindset as oppose to just gradually going that route due to the profitability factor.

    Alan Yu 1/13/2009 4:40 pm
  • The store you mention is probably one of them, but there are many of those kind of stores. It was the same in the UK, except for the longest time we also had a selection of places to buy domestic appliances.

    I used to look for the small local store when making purchases. Firstly I liked helping the ‘little’ guy and normally I received better service. The price was normally close enough not to worry. I see that (although have not purchased anything) with stores selling vacuum cleaners for instance.

    As you know :-), when buying a TV (normally for friends), providing I know what I’m looking at I will go for the cheapest option. You can imagine my thoughts on the whole idea of a 50″ TV, but it’s not my business.

    So the test is, can you find a product which everyone wants/needs, but needs to be financed. Electronics are the easy thought, but what about holidays (it’s about the insurance), air travel (it’s about the taxes) and so on 🙂

    Stewart 1/13/2009 6:49 pm

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