Microbusiness Mentor

I did an experiment some time back, of using cash to pay for groceries versus using credit card to pay for groceries, as way to be more “disciplined” about how I was spending money on groceries.

After a month I went back to using credit card.

Cash was more inconvenient and then I had a lot of loose change to carry around, then I had to manage the conversion of all that change into more convenient forms (like using Coinstar, which is a machine in the U.S. that converts all your loose change into a store “credit” — minus a transaction fee of course).

I think the cash v. credit card debate is useful only for those who need to leverage “pain of payment” as part of developing specific financial habits.

This is also cultural as a financial habit. I’m speaking from a U.S. perspective – our society is in love with credit cards no matter how much trouble this has caused many consumers. We are definitely vulnerable to the lure of distancing ourselves from the pain of payment.

However, for some consumers like me, who pay off entire credit card balance each month and carry only 1 or 2 cards (the only reason I have an American Express card is for purchasing gas from Costco – if they start accepting Visa I’d be down to 1 card) – credit cards represent a portable and convenient form of money that also gives me a needed “paper trail” since I’m not interested in saving every single receipt from a transaction.

I’ve also run into cases where I paid cash, only to have the service provider send me an invoice because they didn’t have a record of that cash payment, and I can no longer find the hand-written “cash receipt” that was generated by the administrator at the time of payment.

The first question I was asked was, “Did you pay by credit card?” because this would allow us to query the credit card company or for me to look into past statements for evidence of payment.

That said, I do use methods of “pain of payment” such as immediate notification of the purchase item via email as well as additional notification when the account balance reaches above a certain limit, thus even if I’m 1 step removed from cash payment, I’m still reminded of the actual balance I’m working with.

Internet based exchange of goods and services have made for more difficulty in fairly or accurately assessing “value”.

However, we can then look at the iTunes model and how this has leveraged our shifting perception in value.

Instead of charging by the album, we can pick only 1 song and it is only 99c.

Now this plays into our own fairness perception: “99c isn’t a lot of money!”

- the pricing is even smart to make this 1 cent shy of a dollar, causing us to perceive this amount as even less than it actually is. iTunes may have single-handedly shifted the tide of illegal downloading of music to getting the majority of “good people stealing music” to now “pay for music”.

Then we begin to justify opportunity costs of going online and downloading a song whether or not it’s legal – plus the moral tax (guilt) of doing something we know isn’t right – and now we begin to rationalize “99c isn’t expensive and it’s worth me paying for this song I really like.”

I don’t think many people are thinking along the lines of, “99c is worth the value of the investment and creativity that has gone into making this song.”

Instead, the thinking may be along the lines of, “99c is fair for what I’m willing to pay instead of spending time trying to find illegal uploads of this song.”

In fact a lot of merchants try to figure out the pricing of products that will be high enough to justify their own bottom line and low enough to deter consumers from spending the time to obtain these by illegal means via the internet (usually this means sharing downloads etc.)

The problem with customer “taste” or “preference” is that this is a subjective metric versus objective metric.

This is why marketing works by disrupting or neutralizing our sense of fair market value and at the same time, recalibrate our arbitrary sense of “worth” of a product.

Even if we have the means to objectively and rationally assess the “fair market value” of a product, marketing builds our perception around a product using very subjective measures that are meant to get us emotionally invested in the product, which then means we WANT to pay more because we will rationalize — “I’m worth it.”

A good example is the L’Oreal commercials here in the U.S. I don’t use their cosmetics but I have heard enough of their commercials to remember their slogan: “I’m worth it”.

— in other words, you can buy a $3 bottle of foundation from a no-name manufacturer. It contains the exact “key ingredients” as a $10-$15 bottle of brand name foundation. But hey — “I”m worth it!” Suddenly you are justified in purchasing a more expensive bottle of product because you are making a statement about your self worth NOT about fair market value.

Then — you add in subject aspects to that “worth it” marketing line, by adding perfumes and pretty bottles.

What has been even more interesting is how companies can now sell on “X-free”, and charge you more for giving you less.

Fragrance-free costs more than regular fragrance products.
Fat free costs more than regular fat-laden products.
Low sodium costs more than sodium-laden products.

Shouldn’t I pay more when I’m getting less?

No because I’m getting less “crap”, and I am taught by marketing that my health is worth the higher price I pay.

Why? Because I’m Worth It.