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I have spent most of my adult life analysing consumer companies. I have been the lead analyst on deals valuing and selling consumer companies for billions of dollars, and I have invested money into unknown consumer companies that make billions of dollars.
One of the things I always look for in a really good consumer company is the ability for them to extract higher than normal margins out of what they make and sell to customers. This means that they can buy the raw materials for their products cheaply, and mark up the price of the end product more than any of their competitors.
They can do this because they deploy a huge range of psychological tricks on customers that companies that sell to other businesses can’t.
Think about these two examples.
If you’re making steel bars, you know what the cost of your raw materials should be, and you won’t pay more than that, because if you do, you won’t make enough profit and your business might go bust.
If you’re buying your girlfriend an engagement ring… We don’t need to finish that sentence, do we?
You’ll say that’s different, and you’re right, but not in the way you mean. It’s different not because that’s a special occasion, but because the company that sells you the ring you buy that will make your girlfriend happiest has used a huge range of psychological tricks to create an image that their products are worth much more than it cost to put them together.
It’s not just jewellery companies and fashion companies and cosmetics companies and hotel companies and restaurants and sports goods companies and furniture companies… it’s supermarkets and food companies.
And yes, you’re right, my wife hates going shopping with me!
But if we want to speed up our saving, we have to start recognising where we are being tricked and where we are really getting value for our money.
Shops have different strategies for getting us to spend more money than we need. Some put high prices on products so they can issue vouchers or have “sales” to make them look cheaper. Others have some really cheap products, hoping that we will go in to buy those, and then buy something else more expensive while we’re there.
When we go shopping this week, let’s practice the discipline to buy only the things we need, and only when they’re really cheap.
Here’s how we do that:
This is to stop you forgetting two things. It’s so you don’t forget to buy the things you need, and also so you don’t forget to NOT buy the things you don’t need. Get all the things on your list and ONLY the things on your list.
Every visit is a temptation to buy something that isn’t the cheapest, or even worse, we don’t need. Only go on a planned schedule. Once a week at most.
In some ways it’s easier there to buy only the items you need and check prices compared to other websites.
Don’t wander around the shop (or website). Go from item to item on your list, even if that’s not sensible for where they are in the shop. Run around. Don’t look at other things. Save yourself time as well as money!
Work out how much you can save by doing this and make the effort if it’s worth it. You might have had more spare time to spend more money if you don’t!
We’ve got two exercises for you on this.
Featured in the FINANCIAL TIMES, and the DAILY TELEGRAPH, our MISSION is to help create millions of millionaires. We want people all over the world to use our simple tools to save emergency funds, turn those into investment plans and create the habit that will help enrich their lives.
If you’re interested in financial literacy, please also look at our new project www.maiawards.org