Sometimes Overpaying Makes Business Sense

Thursday, March 15, 2018

I may have struck a nerve with my previous post about how Georgia residents are subsidizing my Florida-based company.

Merely a day after publishing the article, an unknown motorist (and presumably Georgia taxpayer) sideswiped my car and caused a bit of damage to my factory paint job. To call the result displeasing would be an understatement. I'm hoping to keep the vehicle for the next decade or more, so unsightly scratches and an increased predilection for rust are clearly undesirable.

Off to Amazon I went, in search of a touch-up kit for my car. Within minutes, I found what looked to be the appropriate solution. At a mere $11, the paint would hardly break the bank. The offer proved incredibly tempting, given the availability of free shipping, and a price that was 20% below the cost at the closest dealership.

Students of economics will think they know exactly what I did next, but they are wrong. I did not, in fact, buy from Amazon. Instead, I drove 20 minutes to the dealer for the privilege of receiving a higher price.

Why did I do that? Why did I spend additional time and money buying my paint from a dealer?

It all comes down to the security of my purchase. As I describe in my upcoming book Premium, safety is a key component of pricing power. In my case, it was vital that I receive paint that was both genuine and an exact match for my vehicle's color.

Frankly, I just don't trust the Amazon supply chain. Jeff: if you're reading this, I hope you don't take offense. For years, Amazon has been commingling third party sellers' items with its own inventory. This means that even if one buys directly from Amazon, the company will be unable to guarantee that the item has been sourced from the advertised manufacturer.

When it comes to buying items like chairs or sweaters, receiving an imitation product is a mere annoyance. One can simply repackage the item and send it back for a full refund. Automobile paint is very different. A buyer has limited capacity to assess the quality of the item until it is applied to a vehicle, and at that point it would be quite difficult to remove. Sure, I might have saved myself a bit of time and money buying my paint from Amazon, but the risk of a low-quality or mismatched touch-up was hardly worth it. I'd feel absolutely ridiculous driving around a decade from now in a vehicle with poorly matched paint because I felt like pinching pennies back in 2018.

It seems almost unthinkable that in today's day and age, a selling point for an established business would be "we guarantee the genuine status of our items," but that was an important reason why the dealership (and not Amazon) earned my purchase. What was once a problem attributed to willful fraud has been conveniently designed into the online retailer's system as an inadvertent feature.

The dealer even took the safety of my purchase one step further and checked my vehicle identification number (VIN) against its own records to ensure that the paint was an exact match for my car's original color. Sure, I probably could have guessed which of a number of similar shades matched my car's paint, but why take a chance? The service which literally cost the dealer nothing to provide ensured that my purchase would be a perfect match.

One should never separate price from risk. The more a vendor can reduce a buyer's visible risk for a given transaction, the higher the price he will be able to charge.