Photo Credit, David Niblack, Imagebase.net
A higher priced product does not necessarily mean a better quality product. While it is true sometimes, often times, we pay a higher price only because we perceive something to be a higher quality. Other times we pay for higher priced items because we like that brand and are conscious of image. Here are a few things that people assume you have to pay a lot for because marketers have brainwashed us into thinking that the price point is the norm. The companies in these industries also have monopoly/oligopoly over the industry.
Eyeglasses
Glasses are expensive. Recently, I received a coupon for “$200 off” glasses at an optical store and I thought I would get a great deal, but in the end, the salesperson still told me the glasses would cost over $500. I always assumed glasses are just expensive and there was just no way around it. Then I read about a company, Warby Parker, that was turning the eye-wear industry on its head. The founders explained that the reason why eyeglasses are so expensive is because most frames are manufactured by a single company, Luxottica, which controls 80% of the major brands. Not only do they own most of the major brands, they also own a majority of the eyewear stores, including, Lenscrafters, Pearle Vision, Sears Optical, and Target Optical, among others. But wait there’s more! If that wasn’t enough, Luxoticca also owns EyeMed, the second-largest vision care insurance plan in the U.S, which, if you have coverage from Aetna or Anthem Blue Cross Blue Shield, is your carrier. Now it makes sense, the glasses are expensive not because it costs a lot to make, it’s expensive because one company has a monopoly and can control the price. According to an article on the DailyMail, Oakley had a dispute with Luxoticca about pricing so it dropped Oakley from Sunglass Hut, which is surprise surprise, owned by Luxoticca. Luxoticca would later buy out Oakley. So because Luxoticca controls the market, they can price glasses at over $200 when they cost only about $30 to make.
So if you want to find an affordable pair of eyeglasses, you can check out Warby Parker which sells glasses online but they have physical stores in some cities. I haven’t bought glasses in awhile and haven’t gone there so I don’t have personal experience but you can read about Kristin’s experience, who blogs at the Wild Wong. There are also other online eyeglass stores like Zenni Optical, 39 Dollar Glasses, and Kristin wrote about some of those online stores as well. I know many people may not feel comfortable going to an online store but Warby Parker allows you to try 5 frames for 5 days and has a 30-day no questions asked return policy. Also, I read that Costco has good prices. Bob Niedt, who writes for Kiplinger, wrote about his experience buying glasses at Costco . I’m not sure whether Luxoticca controls them, but the DailyMail article mentioned Costco as its competitor.
Mattresses
When I bought my first mattress, I remember my mom telling me not to scrimp when buying a mattress. She told me that mattresses are worth it since we use it so often and that mattresses are supposed to be expensive. This was somewhat odd to me because I grew up with frugality ingrained in my head by my parents so expecting to pay a lot was rarely something that was said to me. My mom is not the only one though and I’ve heard many people, including those who blog about frugality, say that their mattress costs thousands of dollars, but is worth it. I’m not saying that a comfortable mattress is not worth it, it certainly is. But does it really have to cost that much?
If you’ve been paying attention, there seems to be a lot of internet ads for online mattress companies. Much like Warby Parker, these online mattress companies are trying to turn an old industry on their heads. One such company, named Tuft & Needle, says that “mattresses are typically marked up 6-12 times and consumers are mostly paying for “gimmicks, unfair retail markups, sales commissions, and wholesaler’s profits.” Another online mattress company, named Helix which makes customized beds, argues the same thing. According to their website, their team conducted substantial research and “found that there is typically a fairly direct increase in quality as price increases, but only up to roughly the $1,000 price point for a queen. Beyond that point, typically brands are just charging you more for the same materials. Adding on extra features sounds nice, but in practice these extras aren’t adding much to your sleep quality.” The CEO of another online mattress company, named Casper, said that “statistically, lying on a bed for four minutes has no correlation to whether it’s the right bed for you.” He explains that hotels don’t ask people what beds they want, and yet, we often find those beds very comfortable. He said that the salesmen at mattress stores like to play games with customers to get them to buy the what they say is the “most comfortable” mattresses which are always the most expensive ones.
The mattress industry has striking similarities to the eyeglass industry. An article on Priceonomics said that the “whole mattress industry seems to be a giant, make money hand-over fist, anticompetitive racket.” They are controlled by a small amount of companies. Sealy, Serta, Simmons, and Tempur-Pedic make up 59% of the industry revenue. Mattress wholesalers have gross margins of 41 to 64% and retailers mark that up another 96% on average.
If you have the time, listen to this Freakenomics podcast entitled Are we in a Mattress Store Bubble?, which explains why a lot of these start ups are selling mattresses and why there are so many mattress stores to begin with. Mattresses have high markups. Retail profits are steep because manufacturing costs are low. A mattress with a retail price of $1000 costs about $250 to make. While new mattresses have special gels and foams, most people buy a mattress that is similar to the basic innerspring mattresses that have been around for ages.
I still have a mattress that I bought about seven years ago so I haven’t had the chance to try out these new startups. However, a few personal finance bloggers whom I trust gave Tuft and Needle excellent reviews. Amazon reviews also seem excellent. Their return policy is pretty generous. If you are someone who just can’t fathom buying a mattress on the internet, you should at least make sure to try to haggle when you buy at the mattress store. There is a high markup and they are definitely open for negotiation. I wasn’t even thinking to negotiate when my wife and I bought a mattress from Sleepy’s years ago. We were just looking around and not ready to buy so we left the store, but the salesman immediately told us he would knock off $100 and we took the deal. I’m sure we could have gotten an even bigger discount!
Diamonds
They say two months salary for engagement rings right? Is that net salary or gross?? And who made up this rule? Demand for diamonds is a marketing invention, argues Rohin Dhar in a Priceonomics article. Before the 1940’s, the diamond industry was dying so De Beers went to Madison Avenue for help. They marketed diamonds as a symbol of status and love by enlisting the help of Hollywood stars and the fashion industry. The marketing campaign was so successful that in 20 years, a diamond engagement ring was practically a requirement to marriage. Today, 80% of women in the U.S receive diamond engagement rings. This custom has also spread to other countries. And as to the rule about two months salary, the De Beers marketing machine made that one up. Actually, it was only ONE MONTH’S SALARY, but since that rule worked so well, they figure they should increase it to TWO MONTHS!
Like the first two industry, De Beers is pretty infamous for having a monopoly over diamonds, in addition to creating the market for it, in the 1980s, De Beers controlled almost 90 percent of rough diamonds and they would manipulate the markets by buying up mines and intimidating competitors.
Diamonds are marked up 100% to 200%, and if you want to sell your diamond back, good luck getting the wholesale price. According to an Atlantic article, Jack Brod, president of Empire Diamonds, which is a company that buys diamonds estimates that a half-carat diamond ring, which might cost $2,000 at a retail jewelry store, could be sold for only $600 at Empire. Jewelry retail stores don’t buy back diamonds because their offer of lower than wholesale price for something that they just claimed was so valuable would be a bad optic. The whole house of cards may just fall down. Diamonds are not an investment, they are merely a status symbol. Unfortunately, there is no internet company to disrupt this industry, because unlike eyeglasses and mattresses, diamonds have no intrinsic value. Instead, maybe people can buy a different type of gemstone, however I know there is societal pressure to get a diamond. I did read a very interesting alternative on a post from Millennial Boss blog where the blogger sets out her grievances against the diamond industry and said that she went with an alternative: moissanite, which looks strikingly similar to a diamond. And one final reason to consider an alternative to diamonds, Blood Diamonds!
What other products are highly marked up and not worth the cost? Do you think these internet companies can disrupt the monopolies in those industries? Have you tried any of the above-mentioned companies?
This post does not include affiliate links.
The decline in mattress prices is very interesting to me. I have several friends who have worked at furniture stores and often sold $10,000 mattresses. I can’t even imagine spending that much!
Michelle recently posted…The $20 Savings Challenge
I think the online companies are still a very small segment of the industry. Most people still pay the jacked up prices at the physical stores. And $10,000 for a mattress! WOW!
Holy cow $10,000 for a mattress?!? Wow. Speechless.
DC @ Young Adult Money recently posted…Every Credit Card I’ve Ever Churned
How much more comfortable is that $10,000 mattress compared to a $5000 one or a $1000 one??
You’d have to be mad to pay $10,000 for a mattress. A $10,000 mattress is no more comfortable than a mattress that costs a fraction of the price.
Steve recently posted…Loom and Leaf vs Casper
I’m quite sure that we’ll see bubble pricing start to pop for lots of different products as the years go on, people are better informed, and new startups come in to take advantage of arbitrage opportunities. There are quite often deals to be had if you don’t have to have a particular brand of some item and make your selection based on quality alone.
Friends and family often give me a hard time for the amount of research that I put into major new purchases, but they also call me for advice when they are shopping!
Thanks for your insights!
Josh recently posted…Getting Rid of Cable and Saving $985.80 a Year!
Yep, it’s great to see startups disrupt these monopolies. And I always do a ton of research when I make a major purchase.
I put shopping for mattresses in the same category as shopping for a car. Look under the outer layer/hood and you still don’t know what you’re getting.
Thanks for all the links for further reading. I’m glad there’s finally some decent competition in the eyewear industry.
Mrs Groovy recently posted…The Laser-Focus Positivity Challenge
Yes, they like to confuse you so you can’t comparison shop!
Mattresses, diamonds, eyeglasses … here in the US I would add internet providers.
For many years, where I lived, there was only internet provider I could choose from. There are many providers across the country, but they have almost no overlap. So they can technically be ‘competing’ in a same city, but they won’t be connecting the same city blocks.
As a result, Internet in the US is so darn expensive compared to Asian and European internet. But these companies have great dividend yields…
Nick – TheMoneyMine recently posted…2 Paths to Wealth : Which one Would You Bet On?
Yes, excellent point. Internet speeds are much faster and the cost is cheaper in many parts of the world! Why? Because of the lack of competition in the broadband industry.
So true. 1GB fiber was less than $30 a month when I was in Japan. Today for $45 I get 7MB in Seattle. Unbelievable. Remind me in what country the internet was invented?
Wow, that is a big difference! The broadband industry must have pretty powerful lobbyist to keep the status quo.
I spent 2k on my mattress, plan on having it at least 8 years and dont regret it one bit. I spend a LOT of time on that thing and need it to be super comfortable. Its a tempurpedic and i love it!!
Alexander @ Cash Flow Diaries recently posted…How I Saved Over $14,000 Selling My House via For Sale By Owner – NO REALTORS!
For my next mattress, I think I might try out one of these start-ups for a fraction of the cost. Who’s to say it won’t be just as comfortable for a lesser price.
I waited 2.5 years before to buy a new mattress and now I sleep and wake up really well, eyeglasses and mattress are investment on healt and this hasn’t price!!!
Yes, your health is very important. With eyeglasses, there is no difference in the expensive glasses versus the more affordable option. As for the mattress, I understand that sleeping well is important but who’s to say that a $3000 mattress is better than a $1000 mattress? Much of the added price is just a markup. The lower priced mattress may be of the same or similar quality.
That’s what I thought so. Eyeglass price is almost in the same range from store to store. It is like it’s worth it to visit one store as price is till the same. But, I got mine online using a coupon and it saved 30% off, so I guess it’s better to look for deals online.
Jayson @ Monster Piggy Bank recently posted…Should the Government Sponsor Olympic Athletes?
Cool, you were okay with buying eyeglasses online! I think people will get more and more comfortable with that, especially with the prices the brick and mortar stores charge.
That’s right. A couple times I’ve been duped by high priced but supposed to be quality products.
Ivan Jordon recently posted…testking.com.pk
Yea, just because it’s more expensive does not mean it is better quality.
Diamonds are the worst. They are only of value because we say they are.
Holly Johnson recently posted…Our 5 Favorite Money Saving Travel Tools
Exactly!
The Freakonomics episode on the mattress store industry is one of my favorites. I’m amazed at the huge differences between one industry and another, and how margins can be razor thin in some businesses, and preposterously cushy in others.
Done by Forty recently posted…House Lust
Yea, I’m a fan of Freakonomics!
I’ll be in the market for a new mattress sooner and later and I’ve heard about some fairly and reasonable priced mattresses online as well. I will definitely be giving them consideration over retail mark ups.
I’d be interested in how that goes!
I bought my last mattress online through 1 of those TV retail channels. I spent around 1K and they delivered and removed the old mattress. IF you go to a diamond wholesaler you will get better prices / quality than the standard mall outfits.
EL @ moneywatch101 recently posted…Giving Money is Gratitude Multiplied by Happiness
That’s great! How do you like the mattress and do you mind sharing where you got the mattress?
Diamonds. Of course, but I and my wife would just settle to another cheaper jewelry. It’s not about the value but the memories it hold.
James recently posted…Why Having a Great Accountant is Critical When Running a Business
Exactly! Ultimately it’s just a shiny rock.
Whoa man I did not know about moissanite. It’s pretty cool to hear of alternatives. More choices never hurts anyone. =)
Lila recently posted…The $160 refund
Yea it sounds like a pretty good alternative.
I have a moissanite engagement ring. I still spent a bit on it, I think about $1200 in 2013 but a similar sized diamond would have been $20k. I’m happy with it but now with kids etc I don’t wear it much… ha. the jokes on me.
Eyeglasses, i get 2 for nothing with my health insurance and I would never choose the expensive options and pay a gap, I just choose the ones that fit comfortably and look OK from the range that have no gap.
Mattresses – this is where I have to say I disagree a bit, not entirely but a bit. My parents in law bought a $800 mattress from the online startup company Koala here in Australia and its so hard, it only comes in one feel. I need a plush mattress due to having hip dysplaysia and a bad back. We spent $1000 on a mattress on sale (50% off but all the time ha) and it is wonderful. There is a difference if you look at feel, and the plush mattresses cost more because they have more padding etc but for me its well worth it.
Yea, my wife doesn’t wear her diamond engagement ring that often either with kids. I definitely would have gone with moissanite I went back in time. As for glasses, I get reimbursed $150 for them and got one online for that price. They were okay, but I do prefer the ones that I paid a little extra for which are flexible material. My littles boys play rough sometimes and I could see them breaking. With the mattress, I guess it depends on your preferences and definitely tougher if you had hip/back issues. I think most online companies have pretty generous return policy if it’s not the right fit.