The Purchase Decision

This post is going to introduce the foundation of our model of the FP market, and should be a good place for future readers to begin. First though, I'll go through and explain what a model is, so we're all on the same page.

A lot of people assume that models have to be densely mathematical things that require a PhD in economics to understand. They can be like that, but it's certainly not necessary. A model is basically just a simplified representation of reality, a way of thinking that cuts through the complexity of the real world to give you some insights into how things work. The model I'll be using doesn't have any real math but I hope it will give you a new way to look at the FP world and some useful ideas. That's the only real measure of a model, in my opinion: how useful it is. 

So we'll start with the core of the model today and build on it in future posts. The core is (or should be) the focus of everyone who works in the industry: the purchase decision. It is ripe for modelling: a huge complex event influenced by lots of different factors that can be understood pretty clearly if we strip away all of the emotional and psychological factors. This leaves us with two 'rational' factors that determine whether we will make a purchase or not: price and value. Price is the sum of everything we pay to own something (including shipping, currency exchange, taxation, etc - not just the list price) while value is the satisfaction that we take from ownership, or what we'd be willing to pay to own a product. 

Take the Lamy 2000 for example, a truly excellent mid-range pen that might cost around $150. Anyone who values the pen at $150 or more is going to make a purchase, but someone who values the pen at a lot more than $150 (say, $200) is more likely than someone who values it at only $155. 

The gap between these two numbers is called the consumer's surplus, and it is hugely important to consumers. The second person in our example only has a surplus of $5 and they're not likely to be thrilled with the purchase. We might expect them to say something like, "You get what you pay for," and it's generally a joyless experience for them. But the first buyer in our example will be thrilled and talk about the great deal they've had.

Contrary to popular opinion, buyers are not that focussed on price alone (otherwise Nakaya would never sell a pen!) but on surplus. They want the most value for each dollar spent - or, in other words, on getting the most bang for their buck. This is their focus and deserves to be the focus of everyone else in the market too. 

So this is the foundation of the model: price, value, surplus. The next post will have a look at how retailers compete with each other, and later on we'll start digging into the idea of 'value' more deeply. Thanks for reading!