Some Things Should Never be Bought on Price

BBC News, April 9 2008: “Oasis Budget Airline Stops Flying. Oasis Airlines first flew in October 2006, offering flights from London to Hong Kong for as low as $100. It later added the flights from Hong Kong to Vancouver…” Apparently, the airline abruptly locked the doors and engaged into liquidity on April 7th, 2008 while “…there are hundreds of people stranded including children returning from the Easter school holidays…” Some customers lost thousands of dollars in pre-paid tickets for high-season travels. Soaring fuel price and increasing competition is blamed for the downfall…

When I read that, I paused for a second to reflect on the fact. While I’ve never travelled to Hong Kong I still do understand that it is pretty far from either the UK or North America. With applying simple logic I can tell that the airline ticket price must more or less depend on the distance. Therefore I’m wondering how a in-season ticket to Hong Kong may cost about only 1/10th of an off-season ticket to Australia when it is pretty much the same distance, at least from the California’s coast? Do they use 80-years-old plywood biplanes to Hong Kong? Donkey piss for gas? Trained monkeys for pilots? I hope not! May be the owners are just very decent human beings whose goal is not to fill the pockets with profits - as their "greedy" competition does, but to serve the community in humility and self-denial? Give me a break. I’d more believe in using trained monkeys for pilots…

What were those airline customers thinking about then while buying those $100 tickets? I guess they just happily calculated how much they had saved. But it could surely save them trouble if they thought in a bigger perspective. One should always think carefully when they encounter something extraordinary cheap. All flags immediately should immediately go up. Why it is so cheap? Is it stolen? Is it made of a mix of pure lead with grain of cyanide? Or is it because someone is so desperate to sell the product at any price because they can’t sell otherwise? If so, what good is in it for me? Can't my incredible savings turn into some devastating losses?
It seems that it doesn’t occur to many people that according to Adam Smith, in order a business must be making money in order to keep running. The received profits are re-invested which in turn results (not always, but hopefully) in better products and services. Re-investments are also directed into training the staff, implementing newer and better technologies and making the processes more effective and less costly. If there are no profits there’s nothing to re-invest. Even in the age of trading virtual money earned in “Second Life” for carbon credits it doesn’t take a major in Economics to understand that the old laws still apply.

And the main law is simple: if the company is making no money it eventually goes out of business. When? Any second – you don’t know when.
Now, it may be OK to buy cheap jeans or sunglasses on sale at bottom-rock prices because, honestly, you don’t care if the manufacturer will be around tomorrow or in a minute from now. However, it is NOT OK for anyone to buy on price something which is considered to be a long term investment or even a product with future delivery. To be honest, to do so is just plain stupid.

Let’s take technology as an example. When you buy a computer you look at the prices and think for yourself: “I’m smart and I do know how to shop. I’ll go online, find the cheapest computer possible and order it”. When it arrives at the door you notice that it has only 30-days warranty. As it took 35 days to receive it, it’s already out of it. OK, not the cheapest. You go and buy from some more respectable vendor. It comes with 1 year “limited” warranty, which means that if the hard drive fails, you got to ship the PC to the manufacturer and get back in few weeks. It may be OK for a computer used for playing “Online Poker”, but doesn’t seem to be a compelling option for a PC on which you run your business. For a business computer you need something very robust which comes with onsite service and lengthy full warranty. Of course, such a thing costs more – but that’s the price of insurance that will keep your business running if the technology lets you down.

Let’s talk about software. You need a piece of business software (such as a POS system for a Retailer). You go to the manufacturer’s site and find that the price is such and such. Now, you also find that the manufacturer only sells the software through authorized resellers called VARs (Value Added Resellers). They are called so for good reason – because they do not just push boxes , but employ trained staff who will answer questions and help with any aspect of the software. In order for them to develop expertise in the product, the manufacturer gives them (them, not you) margins so they can make profit which may be re-invested into training and business building. Now, you go online and find a reseller who sells the software with huge discount. By just using logic you figure they probably don’t make any money on the sale. But it’s cheap! You’re happy to cheat the system and save couple dollars.

However, before you reach for the credit card, you should really think of consequences. As you know they’re making no money on the sale, how much expertise do they have in the product? Will they be able to support you if you run into a problem or have question? Will they not even go bankrupt before you receive your product but after your card was charged?
OK, you may think that you don’t need any support as you got a nephew (a high-school computer whiz) who will take care of the software. Well, does your nephew know your business as well as you do? Does he have any experience with POS software or related retail business procedures?

Let’s try to see the “I got nephew” logic work in other life examples. When you get seriously sick, you don’t go to a nurse for diagnosis and prescription, do you? You go to a trained doctor. The nurse may help in administering the prescription when the diagnosis is clear and a treatment plan is in place, but it takes a doctor to make the diagnosis and lay out the plan.
When you want to secure the title of your property you may go to a notary pubic just to witness the signature. But then you’re completely on your own with the issues regarding legality of the document itself. If you want security and and peace of mind, you should go to a trained, bonded, professional lawyer. Of course it is more expensive! But the lawyer can provide such guarantee and security because they’ve been making money which has been invested into training, research and building expertise over the years.

Is the point clear yet? There are some things which you should never buy on price. Investment in the business technology (either the “technology” means just one POS computer for a small mom-and-pop shack or a total IT solution for a large national chain) is one of them: a retailer just can’t afford buying technology on price alone… Unless of course they want to find themselves flying in a plywood plane driven by a monkey when the donkey’s piss is about to end and they are still 10,000 miles away from the destination…