Many of us consider the purchase price as the most important expense, but few take into account the lifetime costs.
According to Mint.com, the average monthly spending on all food and dining for Americans is $1,169.
On average, savings accrued from buying groceries in bulk at a Sam’s Club (instead of a Walmart, Target, or another traditional grocery store) amounted to 31%—which more than offsets the annual $45 membership fee if you shop regularly. However, the amount of savings did vary based on the type of item.
While cereal, bread, cooking, baking, and snacks averaged nearly 40% savings, raisins, syrup, bottled water, and sandwich bags can save an average of 66%. If you’re still not impressed, generic household items such as aspirin and hand sanitizer result in savings of up to 83% when bought in bulk.
Most people shrug off these savings because it’s for just a few dollars at a time. Frosted Flakes costs $0.14/oz at Costco in a larger quantity and $0.32/oz at Walmart in smaller boxes. If we compare the two at a standard 33oz box, this makes a box of Frosted Flakes at Costco $4.62, and $10.56 at Walmart.
If John Doe finishes one box of Frosted Flakes every week, he would save $308.88/yr and $3,088.80 in a decade by buying his cereal in bulk at Costco instead of a typical supermarket like Walmart. That’s only for cereal. Imagine how much you can save from all your groceries over time when you buy in bulk. Paying 40% less for a box of Frosted Flakes may seem insignificant, but the lifetime cost effect is a little more exciting. Let’s look at how this affects us in other areas of our life:
Some people consider the listing price of the car to be the most important cost because it’s what you pay up-front. They use the sticker price when considering affordability, but what about the lifetime cost?
Car B may cost $3,000 more upfront, but Car B is more reliable, has cheaper repairs, better gas mileage, and holds its value phenomenally. Instinctively, people infer that car A is more affordable because it is cheaper to purchase. It’s a skill to always consider the lifetime cost of a product, which includes all the additional costs before and after making the purchase.
The study above done by Loup Funds in 2019 found that a Tesla Model 3 was cheaper to own (after 5 years of ownership) than a Toyota Camry LE despite the Tesla costing significantly more upfront. Although the Camry is $14,300 cheaper to purchase, the insurance, fuel, and maintenance are all more expensive than the Tesla. The two cars’ resale value had the most significant disparity which brings Tesla Model 3’s cost per mile down to $0.41, compared to $0.49 for the Camry.
Price is the amount of money you pay to a company for a product or service. Total cost assesses expenses that a price-only focus ignores; this includes all expenses associated with the acquisition, storage, use, maintenance, and disposal of purchased products and services. Lastly, value is the benefit that a customer gets by using a product.
The razor blade business model (also known as the ‘bait and hook’) is a strategy where an item is sold at a low price or sometimes given for free in order to increase sales of a complementary good. Common examples are printers that require ink cartridges, and game consoles that require accessories and games.
This model relies on selling what is perceived as the primary product at a very attractive price. Meanwhile, complementary goods get sold at higher margins. As I mentioned earlier, it all comes down to the skill or effort of identifying lifetime costs. Make it a habit to see beyond the price and take into account the underlying lifetime costs.
Some common products that operate with this strategy are:
- Sony’s PlayStation sells its hardware at a loss and gets its profits from accessories, digital game downloads, add-on content, premium subscription services, and other digital products.
- Every airline offers additional features to a basic seat such as upgraded baggage limits, seats with more legroom, hotel rooms, lounges, and a lot more. They made a reported $28 billion in ‘ancillary’ revenue (revenue from anything other than tickets) in 2016 alone.
- Movie theaters are a prime example. In 2018, 62% of AMC’s total revenue came from admissions, 31% percent was concessions. However, AMC kept 84% of concession revenue as profit, compared to less than 50% of admissions.
- All small packaged items. Referring back to the Costco example above, buying things in small packaging may be more convenient or seem cheaper, but in reality the larger the quantity you buy, the less you are paying per unit. This applies to any category, from food to electronics to clothing. Don’t overpay for something just because the price tag is smaller!