Motivation to Buy!

I read a couple of interesting articles today, and I will put the links to them at the bottom of this post.

Basically they detailed how there is a new line of lucrative business in windshield repair and replacement. In fact so many profits are being raked in that insurance companies are stopping the practice of no-deductible windshield repair and replacement. It seems that windshield glass repair places are going door to door, accosting people at gas stations, and circling parking lots looking for people who “need” free windshield repair. Unfortunately some of those people didn’t need windshield repair until the sales person entered the proximity of their car.

But so what? What’s the big deal? It is free repair right? Not free to your insurance carriers who are seeing a skyrocketing in glass claims at exorbitant prices. Most companies are either raising rates or discontinuing glass coverage as a result.

I always used to say that auto insurance wouldn’t get as expensive as health insurance because people wouldn’t run around crashing their cars, unlike how they don’t take care of their bodies. But apparently some money hungry people have figured out a way to fabricate legitimate claims out of the blue.

There are many angles that I could take on these stories:

• · How the tragedy of the commons destroys anything that is nice and easy (like having glass repair automatically paid for at no cost to the car owner).
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• · How regulations only seem to be a pain and slow down for honest people, and those who are dishonest work the system, no matter what system you create. (ie gun laws only affect people who are honest)
• · How it seems like it is the dishonest people who always win unless they get caught.

But instead I choose to focus on the similarities between insurance, and a credit card that has a nice cushion of available credit.

First though: Why is it that scam artists are willing to work so hard to exploit systems? Why is it that they put all that creativity into making a fast buck instead of doing something that actually improves the world?

The No Brainer Price

While I was going to college I had this delusional idea that I could make up for my lack of cash flow by being an independent salesman (read person who values the freedom to be broke all the time over having to put up with a boss). During that time I learned two important lessons.

1. People don’t buy what they need, they buy what they want.
2. People buy based on emotion, and justify their decisions with “logic”.

I learned these lessons the hard way (read: by spending a lot of time being broke and frustrated) because I have always prided myself on being a very logical and analytical person. It seemed clear to me that if I presented people with the facts surrounding why they needed my product, if they could afford it, they would buy it. Right? Wrong! Why? Because of that little question of affording it.

See most companies that let you sell stuff for them have this nasty habit of asking you to sell it at a price that is just a little higher than what people want to pay for it. This is exacerbated by the fact that if you have to buy it before YOU can sell it, you have to pay a little bit higher wholesale price for it than you wanted to. (This is why network marketing companies don’t really expect you to sell the product for retail price, they just want you to sign people up to pay the slightly-higher-than-you-want-to-pay wholesale price. Have you ever noticed that good salesman quote you a huge price and then work their way down with you to the price that is “just a little more than what you wanted to pay.” Why? Because this creates a temporary illusion that you are getting a “really good deal” because you have now seen what this could cost, and therefore your estimates of what you wanted to pay were “obviously” wrong.

And so salesmen are stuck with the fact that they can’t sell at the “no brainer” price (the price that the majority of people will want to buy at) and still make a living. Why? Because most people want a slightly above average income for what they do, and to get that, you have to charge slightly more than what people want to pay.

So then you have places like Wal-mart that master economies of scale so that they can offer the products to you at the no brainer price…. And people buy and buy and buy. Problem is that the second and third “buy” in the previous sentence were because the first two broke because they were made in China and you have to buy them again. So really you are still paying “slightly more” than you wanted to pay because you did it in “three easy installments.”

So what does all this have to do with insurance? Any salesman would love the job of selling things to people who all had a rich uncle Bob who was REQUIRED to pay the invoice on anything the customer had signed for. Just think of it! You get to convince people that they want something, and then you don’t have to convince them to pay the slightly-higher-than-they-wanted-to price, because Bob HAS to do it. It is the dream world for a salesman.

The debt crisis in America, and the affordable health care crisis, and the new problem with glass repair are essentially all the same thing: The overwhelming creation of a want, with a buffer that allows a slightly-higher-than-you-wanted-to-pay price.

For the debt crisis it is easy credit, which allows you to easily buy what the salesmen persuaded you that you desperately wanted without having to really think about how it affects your budget. This allows you to swallow the higher price because you REALLY want it.

For services like health care and windshield repair that are paid for by insurance it allows you to get the service without facing the full brunt of the price, which creates a buffer between you and the service provider that does not encourage them to be as competitive as they could be.

In short, insurance and credit cards are very handy and at times very critical things to have. (Note I work for an insurance company and believe that when well administered, and when your clients and claimants are honest, insurance is a VERY good thing.)

I am just saying that these two very nice things actually allow inflation to happen by making “more than you wanted to pay” affordable.

So those who put all creative effort into exploiting the system are those who have found that cash comes easier by making someone think they are getting the no brainer price for something, (by making someone else pay for it or put it on “easy credit” with “no interest”) rather than allowing them to feel the full weight of the price of what the salesman is trying to sell.

So is there any hope for legitimate small business? Can someone starting a business actually hope to be successful in it without “working” the system somehow? Can someone starting out provide competitive prices and treat people fairly? My answer is yes, but you need to keep a day job too. Entrepreneurs don’t like to hear that, but the fact is that until everyone is ethical you need some sort of buffer against all the bad guys out there.

Back in my days in sales I had finally started figuring it out and was getting better at making sales and helping people see the value in what I had to offer. I even had a financial pattern set up that would allow me to grow the business gradually and not overextend. Then a customer found a creative way to steal over $1200 worth of merchandise from me. That was enough (since I didn’t have a good day job) to take the wind out of my sails and I only floundered after that.

So in conclusion: people do buy based on emotion, and without emotion there is no motivation. But you can sell at competitive prices if you have another stable income during the build up phase (1-5 years depending on the business). Then when you have the brand and the resources, you will have enough customers and dependable enough systems to survive the scammers out there and still price competitively. I have seen more businesses fail than I would like to admit, but in every case that I personally saw, they failed because the principles were too quick to want to keep the profits for themselves rather than let the business build enough to weather the storms and the bad guys first.

The challenge today is that we have forgotten that when the American Dream was built there was no such thing as a microwave. Impatience is what has created the bad financial state the country is in now.

Teaching patience and ethics to the rising generation is the only thing that will stem the ever growing rate of fraud and inflation.

As promised here are the links to the articles that spurred the above stream of consciousness:

http://redtape.msnbc.com/2010/10/windshield-bullies-a-growing-fraud-problem.html

http://www.propertycasualty360.com/2010/11/03/auto-glass-from-nuisance-to-nightmare#