Positive Feedback ISSUE 73
may/june 2014

 

Is There a "Scientific" Way to Buy Stereo or Other Things?
by Roger Skoff

 

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Many years ago, when I was Director of Business Analysis for four divisions of International Industries, Inc., ("III") I developed an advertising media buying plan for my divisions that worked well enough that it was adopted by all twenty-eight of III's operating divisions and has, since then, been used by many other companies in many other industries. An approach similar to what was used then for buying advertising can be used to help you get the very most value in terms of performance and satisfaction when you buy or add to your home music system or when you buy practically anything else.

What I did with my advertising plan was really pretty simple: I just looked at the problem of media buying from the standpoint of marginal analysis—"What does the last dollar spent buy me?"—and used that approach to figure out which, of the many choices that the company could spend its advertising budget on, was the best for the next dollar spent to actually go to.

The key to figuring that out harks back to something that we're all aware of: the idea of "diminishing returns to scale." At its simplest, all that means is that, beyond a certain point, each new "unit" (whatever that might be) of improvement costs more than the last one to buy, or to "flip" it, it means that spending one more dollar the next time around will—if we've passed that certain point—produce less increase in whatever it is that we're trying to buy than the last dollar we previously spent.

The other side of that same thing—the one you may be less likely to have thought about—is exactly the opposite: "INCREASING returns to scale." It's also true that, up to some point, the more you spend on buying something, the more you're likely to get for each dollar spent. Or, to flip it again, the cheaper each new unit of whatever it is that you're trying to buy will become.

That both of those principles apply to everything we buy is easy to prove: Instead of advertising or stereo equipment, how about something simple like a car? I can probably buy a car that will provide me with transportation for a while for as little as just one thousand dollars, but it's not going to be much of a car and it almost certainly won't last for very long. If I spend more—call it two or three thousand, it's likely that, if I choose well, the car I get for my money will give me a greater increase in value than I had to spend as an increase in price. That same thing—getting a greater proportional increase in value than the increase in price—may continue for a while, but there will eventually come a time when having spent "X" times as much money will get me a "less-than-X" increase in value, and it will continue on from there, giving me a lesser per-dollar-increase-in-value for each additional dollar that I spend. This applies to even the simplest things: Does an "organic" apple or banana that costs twice as much really taste twice as good (or is it twice as nutritious or twice as "healthful") as an "ordinary" one for half the price? Many people don't think so.

With just a little thought, it's easy to see that "increasing" and "diminishing" returns to scale are really just different aspects of the same thing and can, in fact, be plotted (with a vertical axis marked in "cost per Unit" or "Units per dollar spent" or something similar and a horizontal axis showing total dollar expenditures) on a single "U-shaped" curve to show either the "Cost per Unit of Satisfaction" or "Satisfaction-per-dollar-spent" at any level of expenditure. For our advertising media-budgeting, we did just exactly that, and developed detailed charts tracking, as our "Unit of Satisfaction" the cost of responses to our ads at various levels of expenditure in any single medium, and what we found was that if we weren't spending enough in that medium, our cost per response was high, and possibly even TOO high. As we spent more, however, our cost per response kept falling, until—at whatever the optimum point was for each particular medium, it reached its lowest possible level and then, if we continued spending more money in that same medium, started heading back up again.

Hmmm, what to do?

What WE did for our media buys was: 1.) To realize that each different medium that we bought had a different optimum spending level and; 2.) arrange our order of purchase hierarchically, with the medium with the lowest (cheapest per response) optimum spending level first, the next cheapest second, and so on; 3.) then, starting with our first (cheapest medium) we spent ALL of our budget money on that medium until we reached its optimum spending level, and KEPT ON SPENDING in that medium until our cost per response in it equaled the cost per response at the optimum level in the next cheapest medium, and then; 3.) We switched over to that other medium and did exactly the same thing; spending until our cost in it equaled the optimum level in the next medium, and so on, until we had spent our entire budget.

That same SORT of thing can work to give you a SORT of "scientific" approach to buying other things. Of course, there will be significant differences: For one thing, we DID have years of actual spending in numerous actual media to create our charts from and to base our media-buying decisions on—something that almost certainly WON'T be available to you. For another, if it turned out that one single medium was so much better for us that we could spend our entire budget on it without ever approaching the optimum cost level for the next one, that one medium would be the only one that we would buy. You could never do that: For you to go out to buy a system and come back with only one component, regardless of how cost effective it was, would be of no value: Unless you buy ALL of the components you need, you won't be able to play music, and unless you can do that, there's no point in buying anything at all!

So what's the point? Where does what we did apply to you? And how does it help you in any way?

Some of the things we did can benefit you directly, and I urge you to keep them in mind when considering your next stereo buy. The first is simple: Just as, instead of "hip-shooting" our media buys, we had a pre-established budget that we allocated our purchases from, you should also set out IN ADVANCE a total of exactly how much you're willing to spend on your total purchase and STICK TO IT! The next is the issue on which your system and our media-budget most greatly differ: We only had to promote our products and could spend our money in whatever way would best accomplish that. You have to buy ALL OF THE THINGS YOU NEED IN ORDER TO BUILD OR UPGRADE A COMPLETE SYSTEM! That means that, in addition to your overall budget, you must also set out in advance some kind of PROPORTIONAL budget for the things that you must buy: How much for speakers? How much for sources (phono, CD, computer download capability, etc.)? How much for electronics (receiver, preamp, amp, etc.)? How much for cables, or accessories, or whatever else? What don't you need to buy at all? Then, once you have set your budgets, do exactly as we did: Recognize that both ‘not spending enough' and ‘spending too much' will get you "less bang for your buck" than is optimum, and set out to spend each of your dollars wherever it will buy the most possible benefit. Buy (in each of your spending categories) the products that offer the greatest value for the money—regardless of what it might be that you set out as your standard for value for that item—and before you spend any dollar (although in the present market one HUNDRED dollars might be the more useful measure) on anything, ask yourself if that same money spent on some other item might buy you more improvement to your overall system.

If you'll do these things, you never go wrong in making your purchases and—Who knows? It might even be that, by always getting the best value, you'll either be able to save some money overall or find that you have money left over in one category that you can spend for something even better in another.

Happy shopping!

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