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In the retailing and consumer products industry, almost everything happens for a reason. The prices you see for the goods you buy aren't arbitrary or set by accident. In most cases prices are a function of predictable forces that consumers can anticipate--and take advantage of.
But first of all, let's get a little bit meta here and ask a question: what is a price, really?
On a simple level it's just the stated cost of an item. In my old field of investing for example, the price of a stock or a bond is simply a number at which buyers and sellers agree to exchange merchandise. And when there are no buyers for a stock and lots of sellers, guess what? That stock's headed lower. Likewise, if there's a ton of demand for a stock and nobody wants to sell, the price is headed higher.
The same logic holds to a large extent in the consumer products world. When the first Mazda Miata came out, it was such a ridiculously popular car that people happily paid two times the retail price to get one. The first consumer-targeted VCRs cost $2,000, yet they didn't even record. Heck, remember when people happily lined up overnight to get a chance to pay $599 for the first iPhones?
Now of course, iPhones are much cheaper, and you can get a DVD player for twenty bucks. And just as there were opportunities to buy Citigroup stock at $55 in 2007, and opportunities to buy it at $1.00 a share in 2009, there are similar instances where consumer products are deliciously, or nauseatingly, divorced from their value.
The thing is, everything has a price (except my journalistic integrity of course), and that price can vary wildly depending on the circumstances. And that's a source of enormous opportunity for consumers.
Moreover, companies love, and will take maximum advantage of, consumer enthusiasm for new popular items. This shouldn't surprise anyone, especially a savvy CK reader. In some instances, consumer products companies will even go so far as to create real (or imagined) shortages of goods in order to stoke consumer fervor and drive still more perceived value for their products.
What does this mean for consumers? It means that fortune favors the patient. If you can fight off the urge to be an early adopter, if you can resist the urge to always need the latest new, new thing, you will save a substantial amount of money. And the best thing is, you can still have that latest new, new thing. You just have to wait a little bit.
Of course this means resisting the urge to join the herd of other consumers, something impossibly difficult for the vast majority of people.
But think about some of the most prominent human herd activity over the past several years. In the last decade alone I can come up with three herd activities that everybody did, all of which ended terribly: buying technology stocks in 1999-2000, buying stocks at all in 2007-2008, and owning big homes (or worse, second homes) that of course would never go down in price.
Okay. Think about those awful exercises in herd behavior, all of which ended in tears, and then think about products in retail that have driven herd behavior in the past: Pet Rocks, Cabbage Patch Dolls, Tickle Me Elmo, Pokemon cards, Webkins, Silly Bandz Bracelets, etc. (Seriously, need I go on?). When you think about the nearly insane enthusiasm consumers collectively had for these varyingly silly products, the herd starts to seem a bit to easier to resist, doesn't it?
Here's the important concept behind today's post: in the consumer products industry there is often a highly tenuous relationship between the price of something and its true value. Furthermore, time is on your side. Urgency to buy something means you will pay more, often much more, for goods that you can most likely get at far lower prices later. Consumers should always keep this paradigm in the backs of their minds whenever making purchases.
You'll find goods and services priced at all sorts of levels, some absurdly in excess of their value, some absurdly cheap relative to their value. And much like with our body weight, the price of something is an often one-dimensional number that rarely tells the whole story.
Readers, what thoughts can you share?
Stay tuned! We'll have more posts in our series of Understanding the Consumer Products Industry coming up shortly. Please head here for the series main index page.
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was the best and most influential food industry book of last year. Read it, and you will rethink everything you thought you knew about the food industry.
is one of the best books on navigating the modern stock market. The key insight in this book (and sadly, one that many professional investors don't even grasp) is his explanation of business cycle investing. In other words, which stocks and sectors do well when the economy is reaccelerating, and which do well when the economy is heading towards recession? This is extremely useful stuff for every investor, regardless of skill level.
is also extremely useful. I just finished it (and recommended it in 
by Jeremy Siegel. Another great resource, although it's a cruel irony that the central thesis of this book (that long-term stock ownership is the best way to build wealth) was dead wrong over the past decade. But I recommend this book now because Siegel's thesis is likely to be true for the next few decades.
by Peter Lynch. Many people today don't even recognize this weird-looking white-haired guy, but he was a legend on Wall Street thanks to his stellar performance managing Fidelity's Magellan Fund (another cruel irony: this fund began sucking wind shortly after he stepped down in 1990 and has sucked ever since). Lynch's book focuses on all the things regular investors can do to capture advantages over the pros. Today, of course, there are more resources available to the average investor than ever before. Thus when you combine this book with Siegel's and Cramer's books, you can start to grasp why the next few decades could truly be a new era for the individual investor.
Laura and I read it for the first time more then 10 years ago and we've returned to it many times over the years. It changed everything for us.