Marginal Utility…or should you upgrade your Coke?
Economics theory can help to provide some assistance in our finances. No, this won’t be a post about some academic theory of no practical use, this phrase can help your finances a lot. Today, this post will cover the economic concept of Marginal Utility, which is simply the expected improvement of a product when we spend more to buy the ‘deluxe’ version versus the ‘basic’ version, or however the marketing team decided to differentiate the product versions. This will not be a post imploring you to never spend more to get upgrades. There are cases where you should. However, marketing has become so sophisticated with creative ways to get you to spend more for a product/service. In this post I provide some real examples where I faced the upgrade quandary. There are many cases where you can pay more and actually get no extra benefit at all, get a benefit without paying anything additional, as well as cases where an upgrade is necessary to get a functioning product. The following are examples of upgrading decisions that have occurred recently to me that I hope will help you to consider your choices carefully when shopping.
Upgrading A Hotel Room
Reserving a hotel room has been made very easy with the various booking services that are online. I wouldn’t give up the convenience of online booking, but keep in mind that hotels are all about service, and with some persistence and planning you can often times get upgrades for free simply by asking (instead of just paying more through your online booking). I once upgraded a Caribbean hotel room to a water view simply by calling and asking the hotel ahead of time (I also provided a small gift when I arrived as thanks). The hotel room upgrade above was provided at no cost.
In a more recent example, I paid for an upgrade of a hotel room in Provincetown, MA that didn’t provide any extra benefit at all. I reserved the room online and unfortunately due to time constraints, I didn’t contact the hotel directly before I made the reservation. I purchased an upgrade that provided wireless internet access to the hotel room. If I had simply called the hotel ahead of time, I would have found out that the wireless access was unsecure, no extra payment for the network access would have been required.
Upgrading A Car
Automobile companies work very hard to tailor their products/marketing to entice new car buyers to buy upgrades. It makes sense, a new car buyer typically is looking for that experience that can only come with a new car – the new car smell, the shiny sheen of the paint, the knowledge that you are the first driver. These buyers are ripe for unnecessary upgrades.
The easiest way to thwart the upgrade bug is to simply buy a used car. Buying a used car will force you to make decisions about what you actually need, since these vehicles can’t be upgraded on the lot.
If you do decide to buy a new car, first answer the large questions about what you really need, such as:
- How much passenger capacity is required.
- How much utility is required to carry goods/large items/etc.
- What special features are important to you – quietness, luxury, off road ability, special electronics, high mileage, etc.
Once you have determined what you need, stick to the list of vehicles/models on your short list. Resist the temptation to upgrade – take a hard look at what the benefits will be. Do you really need an engine with 50 extra horsepower? In most cases you really don’t.
Upgrading Your Beverage
In an Atlantic City, NJ restaurant recently, I was faced with a beverage decision – small or large? Unless I just came off the volleyball court, I don’t see why I or anyone else would need a beverage the size of a large – but something else had occurred to me that spawned the thought for this tip. This upgrade tip may seem trivial and not worth mentioning, but it is nonetheless a very clear example of an unnecessary upgrade.
In the past most restaurants would pour fountain drinks for you. Many establishments have converted to self-serve fountains where you pour your own drink – and in many cases – you can pour yourself a refill if you like. It probably makes sense from the restaurants point of view – they save a lot on labor costs while they likely don’t lose much money in overfilling. Though the restaurant has changed their delivery method, the size choices are still available. So the question is, why would anyone buy a large size when you can simply refill a small one? This is an unnecessary upgrade.
Upgrade Your Camera
Cameras come in two basic types: point/shoot, and SLR. For photos of landscapes, fixed people and other stationary objects, low cost point/shoot cameras are excellent. When I bought a camera last year, I upgraded to an SLR because it has the ability to freeze action, whether it’s fireworks, sports, or simply people or objects moving anywhere. The point/shoot cameras can’t do this well so this was a necessary upgrade.
Once that decision was made and I entered into the SLR camera world, now I am faced with choosing from the dozens of offerings in the SLR family of cameras. The sky is the limit in cost, you can spend many thousands of dollars on SLR camera bodies. After doing some research, I determined that camera bodies come and go, but lenses are forever. So, I resisted the upgrade and bought a low end SLR camera body.