Tuesday, March 10, 2009

Use Product Life Cycles To Save Money

What you know about the market matters, if you want to save money on the things you buy. This is certainly the case with product life cycles. Understand them, and know where in the cycle a product is, and you get to pay a lot less.

Fortunately, the life cycle of most things sold is predictable. A product is born, it is popularized, and then it is commonly distributed. With common distribution comes lower prices. We have all seen this is recent years with DVD players, futon couches, MP3 players and more.

The trick to taking advantage of this knowledge to save money then, is simply to wait if you can. Once a product reaches its "mature" phase (common distribution), it is often less than half of what it cost originally. In fact, the quality and functionality of a $59 DVD player from Wal-Mart may be better now than the $600 ones were originally - and that;s a 90% drop in price.

More good news! Life cycles seem to be getting shorter, so you won't have to wait as long as in the past to get those low prices. Many new electronic products cost half as much a year after they come out. It may be tempting to be among the "trendsetters" that buy everything when it first comes out, but half off means that for a little waiting you can afford to buy twice as many things.

To save the most money, of course, you try to guess when the bottom has been reached on prices. A good indicator is when most people who want a product have it. At this point manufacturing costs have probably hit their low and competition is at its greatest.

For the absolute cheapest price, wait until it is a mature product and a new version is being introduced. The old version often gets really cheap as it is cleared out. While its true that you may need the new version for functionality with some products, with others the change is more one of style. If a new style of running shoe comes along, for example, the existing one may get really cheap, even though it does essentially the same thing.

Secret Codes For Pricing Cycles

Retailers sometimes have their own pricing codes that can be deciphered. A "price hacker," tries to break the codes and determine where things are in the pricing cycle. For example, some price hackers claim that when a price ends in "8" ($3.88, $7.28) at Target stores, the product price is beginning its descent, and when it ends in "4" it is as low as it will go.

Watch for clues to these codes, and you might figure them out, but if the store you are in doesn't use such price codes, you'll be doing a lot of investigating for nothing. A simpler way to determine what the prices mean? Ask a friendly employee, who may be happy to show off his or her insider-knowledge. In any case, learning to identify and talk to friendly employees may be one of the better ways to save money.

Two Money Mistakes - Are You Making Them?

We all make money mistakes from time to time. Much of the time, we are vaguely aware that we are making a mistake, or it is even obviously an error the moment we make it. But the science of behavioral economics is showing just how subtle these things can be. Are you making either of the following money mistakes?

Money Mistake - Mental Accounting

A term used by researchers in the field of behavioral economics, mental accounting refers to how we treat money from different sources differently. For example, if you work hard to save $2,000, you might be very careful in how you spend it, while a $2,000 tax refund - which seems like a lottery win - might be treated as less important. Of course, the amount is the same, and you are free to use it any way you choose, but a "windfall" is typically treated differently from earned income.

I used to see extreme examples of this when I dealt blackjack in a casino years ago. Most players had a mental category they called "house money." This was the profit that they had made, or at least the amount that they were ahead at the time. A man might be very cautious betting with his "own" $200 bankroll, but once he had $600 of winnings in front of him, he would start betting more and playing with less caution. "I'm playing with "house money" he would announce.

Of course, the reality is that once he won the money in the first place, it was all his money. He was free to walk out that door and do anything he wanted with the $600 profit. In fact, he would might stop before he ever lost $600 of "his own" money, but this was somehow different. The result was predictable. If some common sense prevailed, he might lose only $500 of it, and still leave with more than he started with. More often, he would lose the $600 AND the $200 he brought.

You might think that this is not a problem you have. But what if you won $1,000 on a lottery ticket, or got a $1,000 bonus from your employer. You could take your windfall and put it into your retirement account or your child's college fund. But do you really treat such money the same as if you worked weekends to make an extra thousand? This is an easy money mistake to make.

Money Mistake - Integrating Losses

This is another tough one to avoid. When you buy that new car, do you suddenly feel like an extra $300 for a better car stereo isn't much money? Of course, it doesn't seem like much when you are spending $22,000 for a car - and that's why that salesman will push these things. But if it isn't too much, why did it seem like a lot to buy such a stereo for your previous car. Just the day before you might have thought $200 was too much.

This is about the psychology of making large purchases or taking large losses. This is another classic habit you see in gamblers. $100 was too much to lose at the start of the night, but once he is suckered into losing $2,000, it seems easier to throw that last $100 out there all at once. This is not a phenomenon limited to gamblers or new car buyers, however.

Suppose you are having a new house built. The builder gets you all excited about the latest refrigerator, which he can include for only $3,000 extra. The day before, that same refrigerator might have been worth just $1,800 maximum to you. In fact, you might buy one for just $1,500 if you wait until you move into the home. But when you are spending (or borrowing) $300,000 to have a home built, $3,000 just doesn't seem so outrageous.

You have to mentally step outside of the situation for a moment to avoid making this money mistake. Ask yourself if the proposed expenditure is one you would have felt good with a week ago. Ask what other options you have. Finally, just wait. A month later - after a large purchase - you might be in a more rational state of mind to decide what something is worth to you.