The Price of Money – a Lender Perspective.

Bag-of-MoneyMoney is not a commodity. By definition, a commodity is a generic product that is bought and sold on price alone. Money, Canadian bills for example, look the same, smell somewhat the same, and are available country wide. But, when you want to borrow money, rent the money in fact, the price for that money is not at all consistent.

Why does the price of money fluctuate from person to person? Why do some people borrow at prime minus rates and some at 18%? It is because, in part, that your lender does a risk assessment of you and your circumstances that affects what they will charge. Let’s look at this from the point of view of a mortgage for your home.

The first consideration is location. If your home is 100 kilometres from the nearest small town of  4000 people, you might not get a mortgage at all, but if you do, the lender will add risk factors. If you default, will anybody buy the property and redeem the mortgage? Your Shangri-La is perhaps too unique to attract a buyer.

Then there is the home price bracket to consider. A home priced to sell in a hot price bracket is easier to mortgage than a million dollar home. There are simply more buyers who equate to an easier exit from the loan in the event of default.

Then there is the loan to value calculation. A high ratio means only that you do not have enough “skin” in the game and if things get overwhelming it is too easy for you to walk away, leaving the lender with your house. A higher loan to value ratio simply means you will pay a higher interest rate or have to give up your first born child.

Then there is your employment. Self-employed or just started a new job? You will pay more for your money. That is because the risk of not being employed or having too little money coming in to service the mortgage is higher than having a nice steady government job.

Then there is your credit report. Credit is something to be managed. Keeping your record clean and current shows that you are fastidious about paying your obligations. Having a low score means you are a deadbeat.

All of the above explains why some people pay 2.5% and some 15% on their mortgages. It is, in part, a reflection of the supply and demand function.

SQUARING THE CIRCLE

SQUARING THE CIRCLE: Consumer Choice and Consumer Segments

square peg

I have been reading about market segmentation and choice. Howard Moskowitz’s research into tomato sauce as retold by Malcom Gladwell on the TED talks led to a big increase in sales by Prego.The company added new varieties to its lineup of sauces – chunky, garlicky, mushroom, and saw a big jump in sales.(http://www.ted.com/talks/malcolm_gladwell_on_spaghetti_sauce?language=en  Moskowitz’s conclusion was that consumers are not one great monolithic entity with one taste in tomato sauce. Therefore, the company needed to offer more varieties and in so doing dug deep into the market.

But merely offering lots of choice leads to lower sales. In Terry O’Reilly’s CBC Radio programme, Under the Influence, (http://www.cbc.ca/radio/undertheinfluence/limited-edition-brands-1.3021076) Terry recounted a test marketing of jam. When consumers were offered dozens of varieties and even inducements, like coupons, sales were still less than where consumers were offered limited choice. It seems that our human brain cannot cope with too much choice. Too much choice causes us to walk away shaking our heads.

How can we square the circle of too much choice simultaneously increasing sales and killing sales?

The companies that have been successful in adding choice already have a market presence. Reebok introduced its soft leather dance shoe in 1982, but gradually offered tennis shoes, basketball and then children’s shoes. There was a time lag as Reebok built its brand and consumer awareness of the benefits of supple leather footwear. Introduced all at once to the market, it could have been hard to sell a monolithic idea to a splintered group of people with altogether different needs and tastes. We are not all the same and so we all do not need the same product.

So how is it done? First create a presence in the market for 1 product or service that is the best or suits your target market the best. Dominate your market. Like the pub in the sitcom, Cheers, Everyone Knows Your Name. This is brand creation. Offer limited choice in that product or service. If you are offering more than 3 or 4 choices, trim. Only when you have some significant market share (you are measuring your market penetration, right?) can you start slowly adding other related versions to the original idea. Even after marketing leather shoes to dancers, Reebok is still best known for…  running shoes.

HOOKER-NOMICS

A DELIGHTFUL IF SOMEWHAT BLUSH MAKING ARTICLE. ASYMMETRICAL INFORMATION AND HOOKER-NOMICS

Assigning a price to a product is always tricky. But what if the product is illegal and the value subjective? Setting Allison Schrager discusses the matter with a happily self-employed prostitute. “I’ve always wanted my own business,” says Andrea …
Special to MORE INTELLIGENT LIFE

Andrea, an attractive, petite red-head, with a warm smile and a degree from a top Canadian university, sits across from me, sipping an herbal tea. She has been working as an independent, high-end prostitute for the last four months.

I ask her how she decided to set her fee, now at $500 per hour.

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