4 Unique perspectives on purchase decisions for the modern consumer

January 2, 2022/ Mental Models

Have you ever been conflicted about purchase decisions or desperately wanted to buy something outside your budget or needs? All of us have probably felt that conflict at some time or the other. Each person has their own subjective reasons and considerations when contemplating a purchase and are driven as much by need, status desires, and utilitarian reasons, as by income level and financial goals.

While we all know why its important to save and stick to a healthy budget, purchase decisions can sometimes surprise us. Planned purchases are easier to regulate because they are less affected by sudden bursts of emotion. Impulse buys, on the other hand, are the danger zone. While the very nature of “impulse buying” is that it is less rational, recognizing the onset of the sudden urge to buy something we didn’t think we needed, is a good first step to controlling our actions. What then though?

Introduction

We all use money to gain access to a variety of things in the world around us. Our purchase decisions are driven by numerous factors, ranging from basic life necessities like food and water, to more luxurious wants like fancy clothing and expensive cars. There will be times when we make impulse purchases, but most of use generally aim to be reasonable and this is driven by our rational mindset. The rational consumer can benefit from taking a moment to ask:

“Is the cost-benefit of this purchase worth it?”

That one question, posed to ourselves, right before we allow our urges to overcome us, can help avoid regretful decisions and wasteful choices. To answer that question, below are 4 unique perspectives that expand the understanding of the words “cost” and “benefit” so that we can navigate future situations more effectively and say no to purchases that may not truly benefit us. In the humble opinion of this writer, behavior changes can be made we “see” the world differently as opposed to merely knowing information. when we identify You could consider these as “lenses” through which future purchase decisions can be viewed- asking the below questions could change the way we look at things and consequently shape beneficial behavior.

1.Cost-per-Use to make purchase decisions

Paying 2000 rupees for a pair jeans could seem “costly” in an absolute sense. However, if my job or daily routine requires me to own a pair of comfortable jeans, the cost-per use may be ridiculously low. Consider this example- I wear jeans to work everyday and typically work about 300 days in the year. Assuming I use an average pair of jeans for 4 years (pretty normal unless you outgrow them), the “number of uses” is 1200 and my “cost per use” is about 1.7 rupees (2000/1200). In a simplistic sense, I pay less than 2 rupees to use a comfortable pair jeans for an entire day while working my job. Alternatively, an extremely expensive party-jacket, with high absolute cost and low usage could actually carry a “high cost-per-use” and may not be actually required. This may reveal a truer representation of “cost” by factoring in the perspective of use and importance of use.

2.Time Cost to make purchase decisions

For most people that work a job or spend time to earn money, there is an exchange of a part of their day for an income. When this income is then spent to buy things, we are in effect, financing each purchase with a portion of our time. This is a crucial point because time, in an absolute sense, is finite and a highly valuable resource. If we earn 80,000 rupees a month in exchange for working 40-hour weeks (or 160 hours a month), then that new pair of shoes priced at 5000 rupees, actually costs 10 hours. That new bag priced at 3000 rupees actually costs 6 hours. In effect, we’re paying 6 hours of our time in exchange for a bag. True cost-benefit calculations should be made after considering the actual cost of each proposed purchase.

3. Opportunity Cost to make purchase decisions

Spending money today has two impacts – (in the present) we no longer have that amount of money anymore and (in the future) we lose out on any possible options that could have accompanied that money. What we “could have done instead” is called the opportunity cost and I would argue that this is more holistic measure of cost. Spending 5000 rupees on a pair of headphones doesn’t really cost 5000 if our goal is to aggressively get wealthy by investing. We have now given up the money and all possible returns we could have earned from investing it. Assuming a 9% rate of return (the average long-term rate of buying and holding the Indian Index NIFTY), the cost of spending 5000 rupees on a pair of headphones today is actually 11,837 rupees in 10 years and about 28,000 rupees in 20 years. This means that if we chose to avoid buying that product and instead invested the money in an index fund, we could see a 28,000-rupee gross payback in 20 years. The opportunity-cost lens helps clarify that perceived benefits (both quantity and quality) should be compared against a holistic view of cost.

4. Capex-v.-Revex to make purchase decisions

The terms “capital expenditure (capex)” and “revenue expenditure (revex)” are important terms in accounting in the context of business expenses. Capital expenditure, in simple terms, is an expense for which there is an enduring benefit that elevates a business’ ability to function. Revenue expenditure is an expense incurred to maintain present levels and the benefit of which is typically not long-term. An example of this is replacing a slower machinery for a better model to increase unit production in a factory (capital) as compared to buying more oil and grease to ensure that the machinery continues to run normally. A similar outlook can be applied to purchase decisions. A good question to ask is “How is this purchase going to benefit me? Is it going to be a recurring benefit that is going to add value to me and help improve my life, or is it a one-time benefit with no exponential value add?” An example could be buying an instructional course in a subject of your choice v. buying a movie ticket. Obviously, an occasional movie with friends is fun, but the example reveals an additional lens that can be employed to screen benefit on a qualitative spectrum. This is not a strict scale- each person has a unique life- but is merely a good question to ask so that we can dig deeper and understand true value in exchange for the cost to be paid.

Conclusion

These perspectives are designed to help us gain a better picture of purchase decisions and, at times, convince us to avoid rash/impulse purchases that we may regret later. The approach and suggestion here is fluid and artistic, not fixed and mathematical. At the end of the day, each perspective is only as effective as the person employing it.

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