Why Do You Pay Too Much

I was chatting with someone a week ago, and he mentioned to me the price he was paying for a particular service. As it happened, I know the amount of effort involved in doing that kind of work, and raised some surprise at the price he was paying – it was about 5 times the going rate. After a little clarification, it turned out it wasn’t quite so bad, maybe only off by 100% instead of 500%, but it left me wondering.

Why do some people allow themselves to be exploited so badly when it comes to buying a service?

What came out of the conversation I was having was that he had hired a fairly skilled and experienced tradesman to do the work for him, and had been informed that he was getting a bargain. Without another quote to compare against, he had little to verify this against, and had to rely on the provided portfolio to make a decision. Naturally, the portfolio was outstanding (I happen to know this tradesman’s work).

What bothered me, however, is that the project he was hiring for was fairly straightforward, and could be done by an entry level trades-person. This is similar to hiring the top lawyer in the country to fight your $100 traffic ticket. She might charge you $5000 for her time, and be sure to get you off, but the question is, do you really need such top talent?

Of course, some people will tell you that they insist on the best, and are willing to pay for it. The price itself is not an issue, as long as they’re getting the best service possible. Without doing some fairly extensive research, though, they are often unaware that they are not, in fact, getting good value for their money.

As an example, look at the case of the lawyer. A $100 traffic ticket is not worth a $5000 lawyer – while $5000 might be a good price for the talent you’ve hired, it’s bad value for the need you’ve filled.

As such, I see there being two reasons people allow themselves to be taken advantage of like this:

  1. They are misinformed about the level of complexity of the task at hand, thinking they need much more than they really do;
  2. They insist on paying for the best, and therefore don’t know the difference between overpaying for the same level of work.

How much research do you put into your purchases? Do you know the difference between a good deal and good value? How can you tell?