This email I just got informs me that I’m queued up to get twelve cents cashback. I think this maybe a sign that my power shopping habits are a bit out of hand. The vendor, the intermediary, and I will bear far more than twelve cents each to see this through.
Two of my rules of thumb about discounting come to mind. Negotiation is expensive and it adds friction to the transactions; but at the same time negotiation allows the seller to scour out more money from the customer. The “deeper relationship” lets the seller learn more about the buyer’s “willingness to pay”. It’s all about cost benefit.
Rule #1: The higher the transaction value the greater the chance of a full fledged well staffed negotiation. That explains why a salesman is part of the process of buying a car, a high end stereo system, an expensive camera, or an Oracle database license. It suggests that one should always negotiate with the hospital, the dentist, the mortgage company, the university. Of course the seller in all these situations would prefer a customer who doesn’t negotate; and in many cases the customer prefers that too.
Rule #2: There is lots of room for technology to shift the curve, so negotiation becomes cost effective for the seller at a lower price point. Coupons, cash back, sales, etc. etc. are all examples of that. In an interesting example of globalization shifting the cost curve for sellers, I was recently shopping for health insurance and found myself talking to a very competent negotiator who was transparently on the other side of the planet.
So all commerce has some negotiation tax included in the price. I wish I had better intuitions for how that tax varies across products. For example, Universities seem unique. They have struggled valiantly and largely sucessfully to reduce the tax. So they are a counter example to rule #1.
I don’t even have a rule of thumb for what the average tax is, 35%?
Rule #1 might lead you to suspect that low priced goods tend to bear a smaller negotiation tax, but then rule #2 suggests otherwise. A stream of low priced goods can pay for the overhead of a marketing/sales department that builds out a slew of coupons etc. etc. Some businesses, VistaPrint comes to mind, seem to be 80% negotiation tax.
You might hypothesize that commodities (cheese, coffee, meat) would have minimal negotiation costs. But for those of those I can save about 30% if I buy in bulk each time they go by on sale; 50%+ if I play with coupons.
Meanwhile I think it would be fun to create an iPhone app that lets the passengers on a plane reveal anonymously what they paid.
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