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February 26, 2010

20

Maximizing Value, The Opposite of Earn More Spend Less

by Fin Engr
share save 120 16 Maximizing Value, The Opposite of Earn More Spend Less

Never having seen the show, a co-worker was describing the premise of Pawn Stars. Personally, there’s always been something sketchy about pawn shops since the operations seem like barely legal fences. Anyway, that’s neither here nor there, so back to the show…

Some poor sucker walks in wanting to sell whatever item they’re trying to rid themselves of. First thing the owner asks is what they think the item’s worth. Once the owner knows that number, the game begins.

Apparently the replies range from the colorful to the mundane, but they all convey the same message – “there’s NO way it’s worth THAT!” Even if the owner hasn’t a clue as to the real value, they’ll become temporary experts to close the deal.

Of course, after they’ve secured the item, the next part’s easy. Turn around, jack up the price, and look for sucker #2. Again, even without the necessary knowledge, the owner can convince any customer that what they’re considering is a great deal and MUCH cheaper than the original purchase price. Don’t forget the original price is different from their purchase price ;)

The profits made from this type of transaction are also the premise of arbitrage. To purchase an item for Cost -1 than sell the same item, without changing its inherent value, for Cost +1.

A little bit ago, I wrote about the importance of earning more AND cutting expenses in order to maximize your savings. I don’t subscribe to the idea that there’s one single solution because your personal finances are a holistic system that requires tweaking from all angles. It doesn’t matter how much water you put in the bucket if the bottom’s riddled with holes!

Well, since purchasing is the opposite of saving, I decided it was important to focus a new post on MAXIMIZING VALUE.

Anyone ever play the game bullshit? Tell each other your cards, then guess the bluffs.

We play it often in real life too, and unfortunately, we’re losing out more often than not. Like I discussed with outsourcing, some things are best left to the experts, but that doesn’t mean to check your brain at the door. And herein lies the importance of education, one of the foundations for Engineer Your Finances.

With any transaction, there’s a provider/seller and user/buyer. Both parties want to maximize the return on their investment. Too often, we see scenes of the provider/seller squashing the value, and increasing their own return, by capitalizing on the user/buyer’s lack of knowledge and aggrandizing their “apparent” knowledge. Case in point – Pawn Stars (although the roles are opposite in the above description). Or think of the helpless, broken-down driver at the mercy of a repair shop.

I have no idea WHAT’S wrong, but SOMETHING is – please fix it!”

[Insert greasy mechanic wiping off hands and grinning ear to ear]

No problem friend, I think I can help you”

FINAL Stretching Value Less Value Maximizing Value, The Opposite of Earn More Spend Less

Figure 1: Seller's Advantage

Being very visual, I created graphics to help illustrate these points (nerd alert). Figure 1 above will be the diagram for “Value: Seller’s Advantage”. As you can see, the seller weakens the buyer’s value by coupling the seller’s lack of knowledge with an increase in their apparent knowledge (real or not).

The thing that perplexes me is when people are aware of these situations, yet they fail to act and change the transaction to their favor. Relating back to the Pawn Star example, wouldn’t it have made sense for the sellers to research the items before walking in? Having some sort of baseline, even if it’s slightly outdated, a little too wide of a range, or not specific to your exact item – it’s still better than nothing!

Alright, so now that we’re all excited…how do we combat this?

The boring part requires you take the time to educate yourself on whatever it is. Car making funny sounds? Simply searching “car noise + [insert onomatopoeia-like words]” will give you at least a general idea as to the problem. The more you learn about the topic, the more confident you’ll become in your own abilities and the easier it will be to recognize someone’s falsifications.

The fun part comes in calling someone on their bluffs! Listening to someone go on and on about how this or that, then coolly replying – BULLSHIT! Demonstrating any level of knowledge will require the seller to back down, proceed less aggressively, and carefully choose their words. This momentary “mental stun” gives you, the buyer, a huge advantage. Much like in boxing, martial arts, or any other combative sport – now’s your time to strike!

FINAL Stretching Value More Value Maximizing Value, The Opposite of Earn More Spend Less

Figure 2: Buyer's Advantage

The end result is illustrated in Figure 2 below, “Value: Buyer’s Advantage”. While You may not receive the true value/cost of the item, but understanding what exactly you are buying and what is involved with it, you will significantly stretch the value of the item in your favor and more likely receive the best possible price.

The interesting thing about both these conditions is that the outcome is really only dependent on ONE factor – EDUCATION. Having it will get you out ahead, lacking it will get you hosed. The greatest benefit of understanding this and implementing it is that does not just apply to personal finance, but all facets of life.

Being able to call someone on their bluff can be a very thrilling and empowering moment. Has this ever happened to you? How did the game change after? Did you get anything more from the transaction?

20 Comments Post a comment
  1. Feb 26 2010

    Great post and agreed; Education is the key, knowledge is power especially in a process of negotiation.

    It’s unfortunate however that so much damage is done by one party taking advantage of another. I really appreciate the position that Henry Ford took when he said: “There is one rule for the industrialist and that is: Make the best quality of goods possible at the lowest cost possible, paying the highest wages possible.” In doing so he grew his company from making 10,000 Model T cars per year to making 1.5 million in less than 20 years yet the real price and even when adjusted for inflation dropped almost every year of production.
    .-= LeanLifeCoach´s last blog ..Combat the Closing Techniques – The Power Of Suggestions =-.

    Reply
    • Fin Engr
      Feb 26 2010

      @ LLC:

      Completely agree. I never knew that about Henry Ford, but it makes sense. Nowadays, profits are derived more from manipulation than actually creating value. I can appreciate the reasoning behind his statement
      a.) by limiting your costs, you can pay out more to your workers.
      b.) by gainfully employing your workers, a better quality product will be produced.
      c.) by creating a better product, the profits will grow organically if you continue to remain the best available on the market.

      Reply
  2. Feb 27 2010

    Kind of beautiful when you put it that way. Why don’t more companies take this long-term view?

    You may also not know that while Toyota is often credited with creating “Lean Management,” it was actually inspired by Henry Ford. In his memoirs, Kiichiro Toyoda it was stated that he was never far from Henry Ford’s book “My Life My Work.”

    A fabulous book by the way!
    .-= LeanLifeCoach´s last blog ..Combat the Closing Techniques – The Power Of Suggestions =-.

    Reply
    • Fin Engr
      Feb 28 2010

      @ LeanLife:

      Thanks for the title. I’ll add it to my never-ending to-do list ;) Not surprising though, many ideas start WAY before most people realize, and are tweaked/reformatted/modified until it gets to a point to mass production/distribution.

      Reply
  3. Feb 27 2010

    What great graphics used to illustrate a point! I’m in total agreement, as long as you have an arsenal of knowledge (through research, etc.), you have more of an advantage when you’re up against slimy salesmen.
    .-= Little House´s last blog ..Wonderful Passive Income =-.

    Reply
    • Fin Engr
      Feb 28 2010

      @ Little House.

      Thanks! Visuals help (me) a lot, so this trend will probably continue. Keep in mind, salesmen (and women) aren’t necessarily slimy themselves, but its the nefarious techniques SOME use to “pull the wool” over the consumers.

      Reply
  4. Feb 27 2010

    It is sad that so many consumers (including me sometimes) just assume that the asking price is the only price. We don’t even research options before buying. Good post!
    .-= Ken´s last blog ..Weekend Edition =-.

    Reply
    • Fin Engr
      Feb 28 2010

      @ Ken.

      Right on. Consumer education should (theoretically) dictate the market, right? If we all know what a “good” price is, than companies can’t normalize their profits by “giving in” to the educated consumer and “hitting it out of the park” with the unknowing consumer.

      Reply
  5. Feb 28 2010

    Maybe I’m naive to think that both parties can maximize value. Today most of the value is in information and services. Why can’t we pay for proper value and the person providing the service receive proper value for providing it? Is there such thing as a win-win because of the fact that both people in the transaction have different perspectives?
    .-= Evolution Of Wealth´s last blog ..Pricing Your Disability Insurance =-.

    Reply
    • Fin Engr
      Feb 28 2010

      @ Evolution.

      No, not naive at all. Businesses should be expected to make a profit on their products and/or services. What the post was addressing was more that the profit should be in-line with services rendered. Easy example is think of going out to eat or getting a haircut. If the provider is very attentive, fulfills your requests, and provides you with an enjoyable experience – then you usually reward them with an above-average tip, right?

      Regarding the win-win, it seems like there should be. There’s probably many psychological factors that come into play though…

      Reply
  6. Mar 1 2010

    Happens to me every time I go to the car dealer. I call their bluff, and they come back and say “ok”, and I thank them and walk away. I donno why, I’m just a sucker for negotiations and walking away. It’s just so much FUN!!
    .-= Financial Samurai´s last blog ..The Curse Of Making Too Much Money And Not Pursuing Your Dreams =-.

    Reply
    • Fin Engr
      Mar 1 2010

      @ FS:

      HA – what is it about the “walk away” that makes it so powerful? Seems like when parents threaten kids that they’re going to leave the store if they don’t pull it together.

      Not there yet, but my ultimate goal would be to walk into a Porsche dealership, convince them I’m a viable candidate for a 911, negotiate a test drive, and then graciously bow out.

      Reply
      • Mar 5 2010

        You can total go for a Porsche test drive now! Thanks to the internet, and folks like Zuckberg from Facebook, you never know who is the mega million/billionaire!
        .-= Financial Samurai´s last blog ..The Curse Of Making Too Much Money And Not Pursuing Your Dreams =-.

        Reply
        • Fin Engr
          Mar 7 2010

          @ FS.

          I’d thought of strategies before. Problem was, I was still nervous (as a college student) and I’m a little hesitant because of the blatant deception. Plus, Porsche’s aren’t the cream of the crop….it would be much cooler to drive a Bugatti or the like :)

          Reply
  7. Nice job digital Picasso!

    You’re right, knowledge = power = money = value. Or in some other order… essentially all the same thing.

    Hopefully someone doesn’t call Bullshit on my blog posts! ;)

    Never been to a pawn shop, have you?
    .-= Ryan @ Planting Dollars´s last blog ..Why Ideas are Like Sperm =-.

    Reply
    • Fin Engr
      Mar 1 2010

      @ Planting $.

      HA. Someday, 100s of years from now, I’ll be in an art museum. And little kids will be shown my drawings and told, “See these rudimentary, cave drawings children? This is why that generation struggled so much with debt”.

      Went once. I was given a watch which I knew the value of, and wanted to see what they would give me (I don’t wear any types of jewelry, including watches, its going to be a struggle to keep the wedding ring on!). Obviously, I didn’t sell it so now it’s an expensive dust-collector :)

      Reply
  8. Simple in France
    Apr 16 2010

    I’m a little late to the game on this post, but I can somewhat see this at work with our antique shop owner. He’s a veritable repository of knowledge about things antique, but he could be totally making this stuff up and we’d have no idea.

    That said, we don’t buy his items for their antique value, but for the fact that they are extremely sturdy versions of the cheap-o modern alternatives. So we usually think his price is fair.

    As for cars, we are buying one today (eek, must get to the bank!). We did a lot of research, knew what we wanted, what it was worth and made an offer. So far, so good.

    Reply
    • Fin Engr
      Apr 16 2010

      Whoa whoa – big day! How’d the purchase go?
      ha – a repository of knowledge. Areas like these (antiques) are highly subjective and hard to benchmark and price compare.

      Reply
  9. Fin Engr
    Feb 28 2010

    @ Ted.

    Interesting strategy – cash is king as they say. Your equation: Cash + Education = Leverage is dead-on! Nice financial engineering ;)

    I’ve often wondered this myself. For example, let’s consider a home. Sellers are looking at the “discount” off the recent highs their homes are being listed at, but how much of a real return does that represent from when they originally purchased? Even if the assessed value is 30% lower than the high point, it could still translate to a 20% profit for that homeowner. Not too shabby!

    Reply
  10. Fin Engr
    Feb 28 2010

    @ David.

    Oh yes, too much haggling isn’t a good thing. Along the lines of running your finances like a business, acquisitions don’t always work out. Both businesses attempt to negotiate a deal, eventually reaching a stalemate realizing the deal won’t work. At that point, they cut their losses and walk away.

    I was given an interesting point recently. In engineering, the stereotyped idea is that you do through iterations ad naseum until you reach the EXACT answer. But really, in order to be efficient, you instead go through ENOUGH iterations to make the best judgment based on the available information.

    Reply

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