Cost or Value, which is more important?

Over the years, as consumers, we have been conditioned by manufacturers to believe that we should accept a lesser quality product because it has a cheaper price tag. Why should we buy a dearer product when it will be superceded by a new model quickly? We have become a throw away society who expect to replace items multiple times within our lifespan. Gone are the days when we bought an item thinking it would probably outlast us, or are they?

A lot of consumers, both private and public are now starting to look at the value they get from an item rather than the cost. Government departments are now mandated to look at the “Whole of life – Value for money” costs before accepting any tender. No longer does the cheapest tender win the job. Why has this happened and what is “Whole of life – Value for money”? Let’s take a look at both of these questions.

Firstly, why do they have to look at the “Whole of life – Value for money” on a project? Because the simple process of just accepting the lowest tender wasn’t working. Many purchases made by the government just simply did not last or do the job that was expected of them. When you have 3 -5 companies tendering for the same job, knowing that the only way they will get the job is to be cheaper than the others, they have to look at ways of reducing costs. This has resulted in inferior products being used or even company collapses half way through a project. Then, when another company has to step in to fill the void, the price increases dramatically. The original budget ends up with a massive blowout.

Ok, so what is “Whole of life – Value for money”? It is basically, what is the cost per year of the product or service over the expected lifetime of that product or service. To give you an example, back in 1987, the days of tariffs on electronic goods imported into New Zealand, I bought a 14 inch portable TV in Singapore for $459 (it was worth about $789 here then). That TV I had for over 20 years until it became obsolete or broke down, not sure which. That TV cost me around $23 per year over its life.

If I adjust for inflation, that $459 would now be worth approx. $1060. The $23 would be around $53 per year. For that figure I could buy a 55 inch flat screen TV with twin double overhead cams, polished sidewinder exhaust sporting titanium spoke rims and a custom paint job, which will only last 2 years unless I pay more for an extended 3 year warranty. If I somehow managed to get 5 years out of it, then its “Whole of life – Value for money” would be $212 per year.

So what does all this mean for us? As consumers we need to see and understand the difference between the bottom line and the “Whole of life – Value for money”.

If we were to purchase a home improvement system that cost us 50% of another system that had a 20 year unconditional guarantee, only to find out a year later that it did not live up to the hype and needed to be replaced, then that system suddenly became 10 times dearer than the other system.

As I have heard many people say before “Cheap is not quality and quality is not cheap”

I believe that the cheapest price tag is generally on the most expensive item. If you have to replace something because it did not do what you wanted it to do, then you have thrown 100% of that money down the drain.