“No one ever got rich paying too much for something” Warren Buffett
People buy five gallon drums of mayonnaise or ketchup at Costco or BJs because they want to ‘save’ money. Unfortunately, saving is the opposite of spending. The 5 gallon drum of ketchup costs a lot more than a 14 ounce bottle of ketchup even if the price per ounce may be lower. If you’ve got a huge family, maybe you’ll use the entire 5 gallon drum of ketchup, but chances are you’ll end up throwing most of it away. This is a classic sales volume discount trick that companies that sell stuff use to get consumers to spend more money--ultimately, in their effort to save more, consumers usually end up spending more. Unless you’re a ketchup wholesaler, you don’t need to optimize the price per ounce you pay, you just need to buy enough ketchup to satisfy yourself and your family.
Businesses often make a similar mistake when they accept any customer regardless of the price the customer pays or the specific terms the business is required to provide. One of the biggest foreclosure law firms in NJ went bankrupt because they offered to process foreclosure lawsuits for $200 each--they attracted a lot of business from banks but if you think about it, the law firm’s overhead was likely much higher than $200 for each foreclosure action they were responsible for filing! Instead of optimizing net profit per transaction, the law firm was optimizing the total amount of business they could bring in the door. Losing money on every transaction is not a winning strategy. Make sure you know exactly what your actions are optimizing. Onward & upward.