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Anatomy of a Bargain – The true cost of products (Part I)

Fairtrade logoA while ago I was representing our teahouse at an expo and some of the comments from visitors caused me to think about the concept of value – or rather our perception of cheap vs. expensive.
I’ve contemplated this subject for the last six months or so and the discussion to a recent article on the Ecocentric blog has inspired me to finally put my thoughts into words.

For most people, the price of a product is a number printed on a label. The smaller the number, the lower the price or the cheaper the product. Throughout this article, I will use the word cost instead of price, since I believe it represents more accurately the issue at hand.
Cost – in the sense I’m going to discuss the concept – is not as easily understood as a simple number on a price tag. In my opinion, there are at least 3 main factors that determine cost: quality, social and environmental issues.

I will discuss these issues in a series of two articles in which I’ll attempt to show you that the following statement is false – at least from a holistic point of view:

LOW PRICE = CHEAP

In this first part, we’ll have a closer look at the role of quality in the evaluation of real cost; the second part will focus on the social (i.e. slave labour) and environmental issues.

Why I think about cost

I think a short summary of the issue that caused my involvement with the concept of cost might be helpful to understand my motivation to write these articles.
As mentioned, I was representing our teahouse at an expo and had made some tea-infused truffles especially for this occasion. Following our philosophy, I used mostly organic and fair trade products, only the best chocolate and high quality teas to create something truly unique. I spent three evenings making these truffles and sold them almost at cost price. But since the ingredients are expensive, this approach naturally results in a higher price.
You might understand my confusion when some visitors complained about the price of my truffles, without trying them or considering quality. They did not ask what it was that made those truffles so expensive – a question I would have been happy to discuss.
It is true that our truffles were slightly more expensive than your average cafe variety, but I sold them almost at cost price. Your average truffles are usually made with very economically priced ingredients and have a hefty markup (the Valrhona chocolate I used costs at about NZ$40 per kg wholesale while you can buy Cadbury chocolate for less than $6 per kg!). My “profit” per truffle was about 40 cents (labour not included), while I estimate the margin on cafe truffles is about a dollar per piece (again, labour excluded). It is for you to decide now which truffles are cheaper.

Quality – where cost goes beyond price

There is certainly a place for both, low quality and high quality options. Unfortunately for the consumer, the market is often very vague or dishonest about the real cost of products and consumers are left with price tags as the most obvious indicator. But this indicator is often grossly misleading.

I will give you an example for a non-luxury item like shoes where the quality aspect of product cost is more pronounced due to the higher price.
A friend of mine went shopping recently to buy a pair of shoes. She spent about $100 and returned with 3 pairs of shoes instead of 1 (she came across one of those “buy 2 pairs and get the 3rd pair free” deals). While I was skeptical about the great savings of this deal, she remained happy about this “bargain” until the first pair of shoes fell apart just 3 weeks after the purchase. The other two pairs didn’t last much longer and it was time for new shoes less than three months after the initial purchase! If you extrapolate this pattern, you’ll spend $400 a year in disposable shoes (I realize that that isn’t much money for many people’s shoe habits) while a decent pair of shoes should last you a minimum of 3-4 years. That pair might cost you $200-$300, but in the long-run, it’ll be cheaper. And more environmentally friendly, but more about this in part II.

Cheap = Bad and Expensive = Good ?

Prize as an indicator of quality is also a difficult subject. While a low price is GENERALLY an indicator of a lower quality product (quality raw materials and labour are usually not cheap!), a high price NEVER guarantees that you’ll end up with a high quality product. All too often, low quality products are presented in an expensive looking packaging and sold at a premium. This is especially true for relatively unfamiliar products (tea being a perfect example) where the consumer often doesn’t have a quality standard to compare against.

Since I’m most familiar with the tea market, I’ll use a concrete example from that market. We usually aim to offer the highest possible quality of a certain type of tea that is affordable for our regular customers. This sometimes means that we’re looking for that tea for a long time until we find one that meets our stringent criteria.
I’m aware of a few tea vendors that sell a much more common (read: lower) quality of a certain tea than the one we offer but charge up to 50% more than we do. So, while the lower quality product costs about 30-50% less in wholesale, the retail price is 50% higher. This is not transparent for a consumer who will most likely conclude that the more expensive product must be superior to the cheaper one.

This puts businesses with an ethical philosophy like us in a difficult position: offering very high quality at affordable prices might be perceived as offering lower quality. As a business, you can either give in to the pressure and play the game – adjust the prices to the higher levels of your competitors to correctly represent the quality of your offerings – or go the more difficult route by educating your customers and maintain your ethical standards. This is part of the aim for this article: Educating people to help make better informed decisions!

A question of trust

A simple solution for the dilemma of judging quality is trust: it is very important to find sources you trust. There are many people who’s recommendation I’d follow blindly, simply because I admire their knowledge or know from past experience that they know what I like/need. You won’t find reliable recommendations in a supermarket (where you base your decision on the marketer’s ability to make the product label sound appealing), but you will often find this in a specialized store. Most of the time you can get an idea about the philosophy or ethics of a business by chatting to the staff. The way my inquiries are dealt with always influences whether I trust a specific business’ recommendations or not.

In the second part of this article I will discuss two more factors that also influence the real cost of a product, but which are even less transparent than quality: the social and environmental aspects.

We would very much like to know what you think about this subject. Please tell us about your opinions or experiences by leaving a comment. Thanks.

[techtags: fairtrade, price, quality, product cost]

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  1. […] It’s been far too long since part one of this article, so here finally is the promised continuation. In the first part, I discussed the role of quality in the evaluation of the cost of products. This second article will focus on the less transparent and often forgotten factors that constitute the true cost of a product, namely social and environmental aspects. […]

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