"How do you know that is the best price?"

This is a common question many people ask

Everyone wants to get the best price, it is human nature. If one side of a transaction gets a price that is too high, it is not a fair transaction because most of the value may have been captured by the other side. Conversely, if you get a very low price, then you have captured disproportionate value.

But how do you know what is fair?

In any transaction, price is the mechanism for determining the equilibrium between supply and demand. Unlike in command economies which allocate quotas, etc, a market economy uses price to allocate its resources. What does this mean for me? Well, it means that when you are buying goods and services, you will want to ensure that you are getting the market price. If you get below the market price for the same standard of good or service, then you have won in the trade.

That's the theory, but how about when I'm choosing a builder?

The same fundamental principles apply whether you are negotiating an international trade agreeement, an armistice or simply the price for a replacement countertop in your kitchen. The stakes may be different on the macroscale due to the impact on millions of people, however, the same negotiating princples apply.

Can you walk away and not do the transaction? Yes, this is called the Best Alternative to a Negotiated Agreement (BATNA). This means you should only pay, in theory, up to the amount, that you value the output or service you are getting. If you want a replacement countertop done immediately, then you might pay a little extra, as that convenience value is worth something to you. Whereas, if you don't care whether the fitter arrives today or next month, then you certainly won't pay any extra.

Each person has a different utility curve - that is an equation full of parameters are individual to the person, and each of those parameters has a coefficient that is different. That is why when buying services, especially, the prices range wildly. Each person values different aspects of the service differently. That is why buying services at what is called a fair price is far more difficult to measure than buying a product, such as a TV or an iPhone.

Differing utiliy curve among vendors

Now that you understand that each buyer has a different utility curve, you should also consider the fact that each service provider also has a different utility curve. Some plumbers may not mind unblocking toilets, whereas others, who are also capable of doing the job, may hate it. Hence, when asked to unblock a toilet, these two plumbers may price very differently.

Market dynamics makes it difficult to check prices

Not only are different utility curves among vendors and consumers such as yourself worth considering, there are also market dynamics. As mentioned, products tend to be easier than services because products tend to be more similar. You can Samsung Television and nearly everyone will recognise what that means. In essense, there is a certain level of product uniformity in the market. For markets to operatte, products that are traded need to be uniform, identical so that buyers and sellers know what they are getting. Whilst in theory this works, in reality, TVs, let alone Samsung TVs are not all identical because there are different models, brands, etcs, and all these disrupting factors are ingested by people differently and hence perceptions of Samsung TV will range.

Have you ever noticed how Amazon reviews are all over the place? A product may have 10000 5-star reviews but will also have many 1-star reviews. In many cases, some consumers may have received dud products, but in other cases, a consumer who wanted a sturdy iPhone screen cover may find that when it is a 5-star product for him, the same product for his friend is a 3 start product because he finds it too sturdy. This level of subjectivity is further applied in the trades services because all sorts of factors such as professionalism, demeanour and even attributes such as smell and looks are part of the feedback equation.

Putting it all together and taking practical steps

Now that you know about utility curves, product and service differentiation and subjectivity of perception, what can you do about it to make sure you get the best price?

When markets come together to a market clearing price, that is the price where buyers and sellers transact, there are typically many buyers and sellers on the sidelines that don't transact also. Have you ever heard, 'how can you buy Facebook stock, it is so expensive?' and yet there are many others who must be buying because the stock price keeps on going up. This is because there are more people who are buying than are those selling and hence to get people who value the stock higher than the current price to sell the price keeps going up until it hits the price that they want to sell at. This interaction on the stock market determines price movements as many sit on the sidelines until the price is within the range at which they want to sell.

Practically speaking, how do you determine if the price is right?

The concept is the same as our Facebook stock example. With financial stocks, especially public stocks, there is a lot of information that buyers and sellers can ascertain about the product. For example, its revenue, revenue projections, profits, competitors, and all the rest. However, if you want to compare the price between builders for your kitchen extension, you are at a dead end.

What you must do is put together a detailed cost analysis of the work that you need done, and then telephone 100 to 200 potential vendors so you can get the best price. Does this sound like a lot of work? Yes it is. Unlike Skyscanner.com or Kayak, you can't go to the sites and get the best flight price. If you want to get the best price for a simcard you can go to gocompare.com.

Cleartrade enables price comparison effortlessly

Cleartrade uses advanced technology to get all the market pricing parameters discussed and instantly returns the price to you so that you don't have to bother 100-200 builders for your kitchen extension. So, if you want the best price, why not get it now by using Cleartrade's Get Price function.