The full page
newspaper advertisement can’t be ignored, and not just because of the
impressive color pictures and three-inch headline. The carpet and flooring store’s offering simply
seems too good to believe. “5 YEARS FREE
FINANCING • NO INTEREST • NO DOWN PAYMENT • NO FINANCE CHARGE” If that weren’t inducement enough, the carpet
price quoted apears to be from an earlier, less expensive generation.
Apartment
Grade Carpet, Reg. $5.99 sq. ft.
free
installation w/ lifetime guarantee
Free
furniture moving, Free removal of Old Carpet
Now
97¢ sq. ft. installed.
The last time I saw such a price dates back
to the days when two-tone green shag nylon was the rental carpeting of choice .
. . let’s hope we never see similar bad taste again. With that said, let me offer a brief
instructional session for those of you not intimately familiar with apartment
carpeting—or with the techniques regularly employed in modern marketing.
Carpet prices are
normally quoted per square yard, not per square foot. However, with nine square feet in each square
yard, the conversion is simple. Next is the
significance of apartment grade. Such carpeting is normally of lower quality
and less expensive than what discriminating owners chose to place in their
personal residences. Decent home grade carpet
today starts at about $20 per yard, installed, with the price increasing from
there. By comparison, you might note the
apartment grade carpeting I use in modest
units, those renting in the $750 to $1,000 per month range, is installed at
$13.50 per yard. Thus, a typical 800
square foot rental apartment, requiring about 70 yards of carpeting, will cost
$945 to re-carpet. This is a reasonable
price for middle-income units.
Now consider what
this advertised carpet will save me.
Their 97¢ per foot special, which converts to $8.73 per yard, reduces my
cost to $611 per apartment—a savings of $334.
As you might guess, I paid a prompt visit to their store to see if I
approved of what they offered. An
inspection of their “apartment grade carpet” immediately told the story. It wasn’t at all what they claimed, but,
instead, an indoor-outdoor fabric, the sort you’d find glued to the concrete area
surrounding a swimming pool. I’m
familiar with these coverings, made of polyester with a 0.20 inch pile height,
and sold in six-foot wide rolls over the internet at prices starting at $2.61
per yard. The salesman at the store
acknowledged its unsuitability as an apartment carpet, suggesting instead their
next higher grade: a plush or textured Saxony at $21.96 per yard. You’ll not be surprised to know I fled within
three minutes.
Before we conclude
our evaluation of this particular firm, and its advertising methods, there’s
another matter you must be aware of, relating to the offer of “5 YEARS FREE
FINANCING.” I neglected to mention the
small asterisk immediately following the word financing. If you search the
ad, you’ll find the explanation as a footnote at the very bottom, in the
smallest possible font. It reads: “*5
year financing on approved credit. 60
equal payments, if not paid in full 60 months from purchase date, accrued
29.99% APR will be applied (from original date of purchase.)” I’ll now provide you with a translation and
an explanation.
Very few carpeting
firms can afford to carry a purchaser for five years with neither down payment
nor interest. The way it works is the
contract is sold at the time of transaction to a finance company. A typical home installation, where perhaps
100 yards of the Saxony is foisted off on the buyer at $21 per yard—at a
wholesale cost to the store of $11 per yard—results in a $2,100 contract,
generating a potential net profit of $1,000.
The finance company pays the store $1,600 for the contract. The store makes a satisfactory $500 profit on
the sale; the finance company stands to reap a somewhat mediocre $500 net
return over a five year period . . . on the expectation the homeowner honors
the contractual obligation. At this
point, however, it all becomes surrealistic.
In the marketing
business, payment histories of buyers who make nothing down purchases are well
documented. The percentages of likely
non-payers can be accurately predicted.
Let’s presume 30% of this firm’s buyers default on their obligations at
some point. In the event of default, the
contract permits the holder to assess retroactive interest at 29.99% from date
of sale. If, for example, payments cease
after three years on the $2,100 contract, the homeowner instantaneously owes an
additional $1,889.37. Concerning collectability,
it’s likely the obligation is secured by a mortgage or deed of trust on the
property. As for enforceability of an
unconscionably high rate of interest, prior legislation granted finance
companies exemption from state usury laws.
In short, the homeowner is effectively bound and gagged. As you see, the finance company may expect to
make a fortune off the backs of many unsophisticated carpet buyers. This is how it’s designed to operate and this
is how it works.
Now that you know
the lay of the land, how will you make sure you don’t become a victim of some
marketing scam? I’ll offer a couple of
suggestions. First, and perhaps most
important, don’t begin to negotiate a major purchase of anything until you
develop a pretty good feel for what you’re buying and what its true value
actually is. In the carpet market,
accessing a few websites to see what’s offered and at what prices is easily
done. Then visiting one or two large
carpet outlets can round out your understanding of what you need and what you
will pay for it. With this bit of
expertise under your belt, you’re now ready to begin your search in
earnest. There’s really no secret to
this. Initially you must gain enough
information on a subject so you’ll know if you’re getting the straight story. Simply put: When you master the details, no
one can lie to you.
The second tip I want
to pass on concerns the payment of interest.
With the exception of mortgage interest on sensibly acquired real
estate, I disapprove of paying interest.
This means you do not purchase a motor vehicle on time—nor do you lease
one either. Your vehicle should be purchased
all cash. If it means you must drive a
1984 Toyota Corolla, so be it. And as
for your credit card, when the monthly bill arrives the charges are paid in
full. If you’re unable to adhere to this
schedule, then cut up the card with a scissors and fashion your life
accordingly. Again, simply put: If you
never agree to interest charges, you’ll never pay highway robbery rates.
A final thought: Since
the 1920s, when marketing developed into an art, the American public has been
deluged with a cascade of ingeniously orchestrated sales schemes. Examples are endless and, human nature as it
is, deviousness in marketing goes hand in hand with a successful sales
outcome. Whether it’s a campaign to
peddle a cheaply made pillow for $58, on the assurance it will “ensure the
soundest and most comfortable sleep possible,” or the touting of a presidential
candidate who fraudulently claims to be “good for the working men and women of
America,” more and more the result is tied directly to the effectiveness of the
duplicitous pitch. And these programs are
not merely contrived by the participants along the way. They’re developed by professional marketing
agencies, perfected by legal practitioners and taught in universities to
students who receive degrees in marketing.
Is it any wonder so many consumers find themselves on the losing end
when confronted by the professional marketer and the standard sales contracts?
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If you enjoy this weekly Straight Talk by Al Jacobs, you’re invited to check out my monthly Financial Newsletter, as well as my new book, The Road to Prosperity
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