Tuesday, November 03, 2009

Breakthrough at Tiffany's. (Or, my Tiffany epiphany?) Part 2.

First of all, some of this will sound achingly familiar"another tiresome diatribe against conspicuous consumption, sigh, yawn"but I ask you to stay with it. It may develop a new level of traction for you as we move along.


I give you a pair of new 2009 vehicles (you can thank me later): a Nissan Altim
a 3.5 SE and a Rolls Royce Phantom. (The latter, by the way, is the vehicle-of-choice for Joe Vitale's $7500 inspirational ride-alongs.) Both zoom from a standing start to 60 mph in under 6 seconds. (Some so-called "enthusiast sites" claim to be able to bring the Altima in at under 5 seconds. That's downright Ferrari-esque.) Both manage a lateral acceleration of about .8g, meaning that they stay reasonably flat—and comparably flat—in corners. Braking is comparable, too, though the Nissan does appear to shed speed a bit quicker in panic stops.* Both cars seat five passengers comfortably.

One costs $25,180. The other, about $400,000. Plus $5400 for your gas-guzzler tax.

There are some major differences in performance. Notably, the Nissa
n gets about 30 miles per gallon, highway. Your new Rolls will eke out 15 mpg at best. (Hence the tax.) Make no mistake, the Phantom wins for creature comforts: meticulous hand assembly, a 420-watt stereo system, all that "Connolly leather" that once played such a prominent role in those stuffy Jag-you-are ads from the early '90s, and seemingly a few rainforests' worth of burnished, honest-to-gosh rosewood. The Rolls is also a few decibels quieter than the Nissan at highway speeds.

But...four-hundred-thousand dollars? Versus $25,000? To connect those familiar points, A and B? Do a handful of decibels here and a few slabs of rosewood there justify a tariff that would buy you a veritable fleet of Nissans
? (And anyway, a high-output stereo system and a "buttery-soft" leather interior can be had on the Nissan for an additional $1700, total.) And consoling as it might be to enshroud yourself in a leather cocoon while cruising at speeds limited by legal and practical considerations to half of what either car's superfluous horsepower can deliver, what do such extras do for you, anyway? With advantages that intangible, you almost wonder if the name Phantom is the car maker's sly joke on its well-heeled owners. In terms of anything that can actually be measured or quantified and has a direct bearing on transportation efficiency, the cars are equal. Except where the nod goes to the Nissan.

Here's another way of looking at the foregoing: Only the first $25,180 of the Phantom's sticker price goes towards the vehicle's inherent function (i.e. being a car). In strict transportation terms, what "function" is purchased by the other $374,820? There isn't any. The buyer is not paying any of that $374,820 "for a car." He already bought the car with the first $25,180**. So what should we call that added $374,820?

In my pitch last year for a book that apparently will never be written or published***, I proposed to call it a "vanity tax." This vanity tax is the amount we willingly (often eagerly) pay
over and above what we need to payin order to obtain the basic functionality we seek in any given product, service or realm. For whole categories of consumer items, the vanity tax is 100 percent, because the products aren't needed. At all. I don't care how bad you think you look in the morning, you don't need mascara. Therefore, the cost of mascara, however nominal you may consider it to be in the overall landscape of your budget, is pure vanity tax. 100 percent.

What's more, the aspiration to Rolls-ian luxury is the rising tide that lifts all cars (or at least their MSRPs) as well as the prices of thousands of other consumer goods and services. Though I'm getting a bit ahead of myself, I think I can do a pretty good job of showing that your neighbor's snazzy new Mercedes is costing you money. We'll walk through that next time. For now I just want to leave that tantalizing thought in your mind: Every time your neighbor buys a fancy car (or stereo system, or tailored suit, etc.), you're paying for part of it. Every time you buy a fancy car or stereo or suit, your neighbor pays for part of it.

Whaddya know! Obama or no Obama, we're a socialist economy already!

A variant of this same phenomenon explains why cars look the way they do. It is no accident that a Ford Focus looks like, well, a Ford Focus. If automakers wanted to make a vehicle that looks more like a Corvette but costs more like a Focus, they could easily do so. It's just sheet metal. But by now we all know what status looks like, so if you want status, you have to pay for it. This is a patent and calculated attempt on the auto industry's part to extract money from consumers in exchange for...nothing. Nothing that actually does anything. Status is the one vehicular component that has the highest resale value to many Americans, and few manufacturers are going to just give it away. Even though in functional terms, that part of the car is totally inert.

Consider, too, women's shoes. We've talked about this before, but those sexy $600 high heels with the red soles are not "better shoes" than the $29 flats available at Payless, i
f we're using as our benchmark the textbook function of a shoe. As a class, in fact, high-line stilettos and other "fashionable shoes" may rank among the worst shoes. They're often less comfortable to wear, they can cause permanent foot damage, they're less safe in other ways (how fast do you imagine you can run in them, if, say, you're fleeing a would-be rapist?), and you can't even assume that they'll last longer (there are anecdotal reports of much-ballyhooed Jimmy Choo shoes coming apart at the seams in a very short period of time). So the lousy shoe
which is to say, the shoe that does the worst job of being an actual shoe—often costs more. But women fork over $600 so they can cross their legs at work and let their female coworkers ogle the red soles.

Nowadays almost all products cost more than is necessary to fulfill a product's basic function—assuming it has one. (What's the function of a pendant? Even a $39 pendant? It has none.) Whole categories of items and services exist for the sole purpose of enabling buyers to pay more than they'd have to if all they sought was a serviceable car, coat, camera, TV, handbag, vacation, golf lesson, et cetera. Whole industries are happily and profitably engaged in the ongoing business of providing a useless product (again, by our strict definition of "use": Does it do anything? Anything that requires doing?) It is hardly beyond the realm of possibility that the economy would collapse tomorrow (worse than it already has)—a mass implosion of the NYSE, led by many of America’s best-known brands—if consumers today began consuming products based on utility. What a remarkable statement.

Next time, in Part 3: The small picture.

Read Part 1.

* I had trouble pinning down an exact stopping distances figures for the Phantom; perhaps Rolls owners do not trouble themselves with such minutiae. But a variety of Web references make the two cars appear generally comparable, with 60-to-zero distances of between 125 and 130 feet.
And one could plausibly argue that there's no reason to even spend $25,180 on a car in the first place.
*** It's another one of those long stories.


Anonymous said...

You think Jimmy Choo shoes are a waste of money? I think they are the best $600 I've ever spent. I just bought a pair today, but they were not for me, they belong to a female employee. She always wanted a pair, and she's had a great year so far, but she would never dare buy such a thing for herself. So I told her to go shopping for a pair and I would pick up the tab. I need her motivated for the upcoming busy holiday season. Those shoes will pay for themselves by Thanksgiving.

And as far as a vanity tax goes - where does it end? You don't need toilet paper. The guy next to you doesn't "need" deodorant. Most of your food isn't "needed" - look at what North Koreans survive on. This country was never based on "needs"; it's based on "wants". So unless you volunteer to slap a vanity tax on your book first, please refrain from casting stones. Another problem with taxes is that the money goes to the government, and it's just pissed away in exchange for votes - from Haliburton to ACORN, it's going to be squandered.

Chad Hogg said...

Anonymous (3:23PM): He did not say, in so many words, that Jimmy Choo shoes are a waste of money. He said that most of their value comes not from their ability to protect your employee's foot or even to look good on her, but from her and the people who see her in them knowing that they cost $600. Their value to you (employee motivation) just clouds the waters; they only have that value to you because of the value they have to your employee.

Also, I do not think Steve is arguing that there *should* be a literal vanity tax, but that there already *is* a vanity tax, paid to the retailers and manufacturers of items that sell for far more than their intrinsic values.

In any case, your analogy is flawed. Steve says that a Rolls is not "needed" because a Nissan fills exactly the same purpose and that a Jimmy Choo shoe is not "needed" because a Payless shoe fills the same purpose. Toilet paper, deodorant, and (over)sufficient food supplies do have a non-vanity purpose beyond not having any such product.

Steve: Yes! I have always wondered why some upstart automobile manufacturer does not create an attractive car for the average person and put all of their competitors out of business. It cannot cost significantly more in time and materials to make a pleasant looking vehicle than a boxy one, so the only reason entry-level cars look ugly is to give people an incentive to upgrade to the much higher margin ones.

RevRon's Rants said...

My "second parents" get the medical care they need thanks to Medicare, and I'm tickled that part of my tax dollars is so "squandered."

While capitalism does take "wants" into account, the fundamental role of our system of government is to protect the citizens from those who would deny them the things they need, whether those needs be life, liberty, and the freedom to aspire without being hindered by more powerful "others." If it were all about "wants," there would be no place for government at all, with the resulting society deteriorating to one of anarchy or autocracy - pure Social Darwinism.

While such a system might be appealing to the minuscule controlling class, it would be short-lived. The very ideals described in the Declaration of Independence would lead the majority to revolt, replacing the powerful with a horribly inefficient and corruption-prone bureaucracy. That is how Marxist Socialism came to be. Better that our government should involve itself in those areas especially prone to abuse than to have the entire system crumble. The resulting inefficiencies and abuses would be on a much smaller scale than what would result from a violent revolution, and I honestly believe we're moving in the direction of cleaner and more transparent oversight by government.

Those spoiled by unfettered access to power will fight any oversight tooth and nail, much as an errant child rejects its first taste of discipline. So be it. Both will eventually outgrow their petulance.

RevRon's Rants said...

I would also wonder at a professional relationship where the employee needs an expensive gift (such as absurdly expensive shoes) in order to be truly productive. While I've received a number of such gifts from employers over the years, they were never strong motivators. The real motivation was the trust my employer had in my abilities and ethics.

Conversely, I've never bought extravagant gifts for my employees. In return for their efforts, I gave them fair wages, my trust, and most important, my respect. And over the course of many years of managing others, I've been blessed with almost universally motivated and loyal subordinates... despite my never buying them grandiose trinkets.

Anonymous said...

It's a slippery slope here: Steve is whining about people buying things they don't "need" - as if "need" is the supreme qualification for buying something. No, "need" has nothing to do with 90% of consumption, it's all about individual choice, and if someone want to drop over $400K on a Rolls Royce, that is their choice. Good for them! I hope they buy a matching pair!

RevRon: You would think that a woman in her early 30's, making well over $100K a year (working only three days a week, too!) would be sufficiently motivated to come to work skipping and humming Disney tunes all day. But for this top one-percentile employee, fancy shoes (that look like they were designed by a misogynist) punch all the right buttons. Me? Cash always motivated me. Another female employee (similar compensation package)will march through broken glass (metaphorically speaking) for a Gucci purse.

Reading Steve's "Sham" helped me figure out how to motivate my female employees and sell to Mostly female clients. It's the greatest business book I've ever read.

RevRon's Rants said...

"Steve is whining about people buying things they don't "need" - as if "need" is the supreme qualification for buying something. No, "need" has nothing to do with 90% of consumption,..."

For some people, this may well apply. For far too many however, there are never enough resources available to satisfy anything beyond fundamental needs, much less to allow them to base purchases purely on their wants. What you call "whining," I would characterize as observing a lamentable truth: that some people's priorities are so out of whack that they support an entire superfluous industry devoted solely to appeasing their insatiable appetites for ego gratification. But if those are the kind of folks your business needs in order to function, knock yourself out.

Anonymous said...

RevRon: Read "The Millionaire Next Door" by Thomas Stanley, PhD. It will make you feel better about capitalism and those who make it big. The vast majority of Millionaires and Decamillionaires are living a quite, middle-class lifestyle without the ego gratification -driven hyper consumption patterns that you (and I) loath. All the attention is paid to the majority of rich people who blow money on ostentatious goods which deliver very little utility.

Ironically, it's living the hyper-consumption lifestyle that prevents many high-income earners from generation any real wealth - they just squander it attempting to show people that "they've made it". These folks are very insecure.

Most of the rich people never own vacation houses, or Rolexes or fancy clothes or expensive cars. No, they wealthy among us drive Ford pickups and Toyotas and buy their suites at JC Penny and drink cheap booze from plastic bottles. They feel no need to impress anybody; and they give generously to charity.

But the media never reports on them, unless its Warren Buffett. Only the glittering rich get the attention, But they are a small, insignificant part of the millionaire crowd.

Dimension Skipper said...

More than a few years ago I took Mother out shopping and we went into an Army-Navy store. I saw a pair of denim shorts for around $35 if I remember correctly. A few weeks before we had made a family trip to Florida to visit relatives and while there I had gotten essentially the same shorts at the local Wal-Mart there for $10.

So I said to my Mother, "Look at the price of these. I got these same shorts in Florida for $10."

The salesman approached and asked if he could help me. I just said something to the effect of "No, not at these prices. I got the same shorts in Florida for $10."

He then lowers his voice as if in an amazed whisper and says, "Were they Levi's?!"

My response to him was, "No, they weren't Levi's. What do I care, they're denim shorts, same thing."

I almost added, "What, do Levi's have a gold-plated crotch or something?" But I thought better of it.

I've often wondered if a car company could be started up (and profitable) if they just made a small handful of models and (get this...) didn't change them year to year! Just make the vehicles the same each year. Factories would not have to be retooled. Parts would be easily available and affordable. Sure they could change stuff (especially safety improvements) say once a decade or so, but otherwise keep the product utilitarian, not fashionable.

I wonder how many people would go for such a car and keep buying them for children or as older ones wear out in more serious ways to beyond repair. I'm sure there are all sorts of reasons why it's not done and some of them may even make sense. Still, as an idle fantasy I'd be curious if it could work.

Chad Hogg said...

This is off-topic to this post, but I am sure you would be interested in this if you have not seen it: http://www.nytimes.com/2009/11/04/world/middleeast/04sensors.html?hp

Another example of magical thinking probably resulting in hundreds or thousands of deaths, and a company raking in millions of dollars on the scam.

Duff said...

I'm enjoying this analysis. Thanks Steve. And I didn't know Mr. Vitale had such a sham going. I'm surprised he doesn't rent out a stretched Hummer limo though. Come on Mr. Fire, play a bigger game! :)

RevRon's Rants said...

Anonymous - I bear no ill will toward those who have made fortunes, and certainly not toward capitalism. I celebrate individuals who acquire fortunes and use some of their resources to improve the lot of others. Those who constantly strive to purchase that unknown ego-fulfillment, not so much.

I have deep respect for people like Bill Gates and Warren Buffet, and here in Texas, Willie Nelson approaches sainthood for his constant efforts to help farmers decimated by drought, unscrupulous banks, and the IRS. And Willie drives a Mercedes (and has driven the same one for almost 20 years)... good for him.

In the spirit of full disclosure, I do own a pair of very expensive Luchesse boots (prices start at $400 and go way up from there). My son found them, unworn, in an upscale garage sale and bought them for $10! Unfortunately (for him, anyway), they were too large for him, but fit me as if a cast of my foot was used to make them. To me, the bargain price is more significant than the original cost of the things.

Elizabeth said...

I don't own anything expensive, nor do I care for expensive and/or status possessions, but one commenter's opinion, or question rather, expressed in an earlier thread, made sense to me.

Sorry, but I don't remember who it was (LizaJane?) and right now don't have time to go back and look it up.

The commenter asked you, Steve, whether you'd be as happy with a $30* baseball bat as with one that was much more expensive (and, presumably, of better quality)? What say you?

*I have no idea what BB cost, so I made up the price.

Steve Salerno said...

Eliz: I dispute your premise (that "more expense" = "better." I thought that was clear in the post itself). However, to answer your question (on another surreally busy day), if the more expensive bat offers performance advantages--hits the ball harder, farther, doesn't break easily, etc.--I would consider that a worthwhile investment, depending on how much more money it costs.

Of course, at this point a cynic might ask: Do I need to play baseball?

Anonymous said...

And to that cynic, I would respond "Yes! I need to play baseball!"

You gotta live while you are alive.

LizaJane said...

For the most part, I'm with Anonymous (and I wish he'd been MY boss). I think, however, he might be confusing vanity and personal hygiene. He's right that you don't NEED the Right Guard (but maybe you DO if you want to be hired -- no one wants a stinker on staff), or find a mate (ditto), and I don't NEED to dye my hair or wear mascara (but maybe I do if I want to compete with the 25-year-old interviewing for the same job). And no, I certainly don't NEED high heels. After all, I'm sure there are plenty of men out there who find Crocs and Earth shoes attractive -- I'm just not sure I'd be attracted to THEM).

And no, nobody NEEDS a $400K car. Nobody needs a car at all -- not here in Atlanta. Not if you don't mind taking twice as long to get to work, happen to live a reasonable distance from a MARTA stop, and don't mind paying nearly as much in bus fare as in gasoline (my husband actually DID this experiment, just to see what was really involved in ditching the car).

That said, you can't really tell someone where to spend (or waste, if that's how you see it), their money. If you feel you really want to spend $400K on a car, and you HAVE $400K to spend on a car, well, go ahead. I wouldn't do it. But I'm not you.

I bet many people would consider my scrapbooking supplies a big waste of money. I could just stick the photos in a $1 album and be done, right? Of course it's not on the same scale, but it's still a choice about where to put my "extra" money.

Sure, I could see taxing the car because it exceeds a specified fuel-consumption limit. That makes sense. But to tax it just because it's expensive? I don't know about that.

The "Fairtax" people tell me they want to do away with income tax and ONLY have consumption tax (not tax on tuberculosis, tax on stuff). What does everyone think of that?

roger o'keefe said...

Steve, get off this kick already. We get it. You're a redistributionist. You don't like the idea that some people drive around in $400,000 cars and other people can't afford cars at all. I really think that's what's behind this rather than any great philosophical point (and by the way it's all been said before). I don't mean to sound overly critical, it's just that how do you reconcile this with all your theories of true excellence and not homogenizing everyone to some middling common denominator as expressed in SHAM.

LizaJane said...

At the car show a few years back, my husband and I sat in a Hummer , marveling at just how idiotic it was. Not only was it massive -- how can you drive and park such a beast?, it was ugly. The rep popped in and started talking it up, oblivious to the fact that we were not hiding our disdain. Finally, he said, "Yeah, but there are only a few thousand of these made!" I said, "There are only a few thousand cases of Ebola every year, but I wouldn't want one of THOSE, either." My husband and I are still laughing. And still marvel at how people will buy ANYTHING -- if they think it will impress someone else.

RevRon's Rants said...

My personal belief is that any possession that doesn't serve me, I end up serving. Sure, there are things that I own that wouldn't fit someone else's definition of a necessity, but at least those things perform some actual function in my life. It's not about redistributing anything (though some would like to dismiss it as such); it's about looking with a bit of objectivity at our priorities. I, for one, would feel pretty stupid driving a car than cost $400k... especially when I passed a corner where a would-be mental patient was huddled against the rain beneath a plastic trash can liner.

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Anonymous said...

Hm speaking of cars and economy, I was reading this WSJ piece about such things. Quite interesting I thought.