Monday, January 25, 2010

Be sure to maximize savings efficiency


Consider a new metric when making purchases                                                                      

Consumers are faced with several purchasing decisions, some small, such as morning coffee, and others more substantial, like a new television. The question is if savings efficiency is being considered.

When making any purchasing decision, it’s important for one to consider whittling down prices as much as possible. Enter savings efficiency. Everyone likes a bargain, so make it a goal over time to obtain goods and services at the least possible cost and track your efficiency using this method.

Savings efficiency explained

For the sake of example, a store offers a toaster at $50. But, the savvy shopper happens to have a coupon. Apply that to the price (excluding taxes) and now the cost is only $45. Nice work! The savings efficiency is 10%, which may not sound like a lot, but over time, it all adds up. Examined differently, the shopper paid 90% of the original cost. What, the shopper has a 20% off coupon? That equates to paying only 80% of the original price. Now, it’s getting more fun.

The optimal savings strategy

It quickly should become quite clear what the goal is. The optimal shopping strategy is to maximize savings, and in effect, lower the percentage paid of the original price as much as possible. Given typical retailer coupons offered in newspapers and elsewhere, this will usually mean around 10-25%. In most cases, getting products at no cost is impossible, but a worthy endeavor, of course.

But, don’t stop at just pedestrian purchases. Although perhaps a little more challenging, ensuring monthly outlays, such as telephone or cable television services, have been discounted as much as possible is imperative, too.  To learn how to do that, read a prior post on negotiating bills.

It’s easy to make one purchase and feel good about having saved 20% or more, but a more accurate indicator of shopping prowess is to measure purchases over time. Try this exercise: after making a series of purchases over any given period of time, make a note of any discount beside each purchase made on your credit card statement, budgeting software, or other tracking mechanism. Obviously, the more purchases made will reflect a more accurate snapshot of typical savings in a given period.  This weeds out outlier purchases.

How to measure savings efficiency

For the sake of example, 9 randomly chosen purchases were made by this shopper and are shown in the table below, however, none were actually made.  The results were not weighted, so savings impact is equal for all purchases. After averaging out the percentages, the savings efficiency was determined to be 15.56%. Or, in other words, the shopper paid on average 84.46% of their original price. Not bad!
Savings efficiency illustrated

Date


Item


Store
Original Price
Price Paid


Discount
12/24/2009
Toaster
Home Depot
$50.00
$45.00
10.00%
1/10/2010
Television set
Best Buy
$1,000.00
$850.00
15.00%
1/12/2010
Coffee
McDonald's
$2.00
$1.60
20.00%
1/18/2010
Airline ticket
Southwest Airlines
$375.00
$375.00
0.00%
1/22/2010
Cell phone service
Verizon
$50.00
$45.00
10.00%
1/23/2010
Lunch
Panera
$6.00
$6.00
0.00%
1/24/2010
Jacket
Jos A. Banks
$200.00
$150.00
25.00%
1/25/2010
Table
Crate and Barrel
$500.00
$450.00
10.00%
1/26/2010
Toothpaste
CVS
$4.00
$2.00
50.00%








AVERAGE SAVINGS


15.56%




% OF ORIGINAL PRICE
84.44%



The takeaway

Keep the savings game fun and rewarding by aiming to pay as little as possible for what would be purchased anyway.  Challenge friends and family to see how much can be saved and compare tips.