Is it Worth it?

When Chrysler announced Tuesday it would offer three years of gasoline at $2.99 per gallon as new sales promotion, it brought to mind an anecdote involving 19th century American financier J. Pierrepont Morgan.

A neighbor, so the story goes, was talking with Morgan when the topic of yachts came up.

"I understand that you own a yacht, Mr. Morgan," the neighbor said. "Yes, I do." Morgan replied.

"How much does it cost to run?" his neighbor asked.

"Why do you ask?" Morgan inquired.

"Because," his neighbor replied, "I am interested in buying one.”

“My good man,” said Morgan, “if you have to ask how much it costs to run, my answer is: Don't buy one!"

We don’t, as a rule, take into consideration the cost of ownership and operation in making a major – or even a minor – purchase. Does the buyer of a luxury car balk at the purchase because the car uses more expensive premium gasoline?

The Morgan story perhaps has more relevance for buying a car today as the price of gasoline increases but relates as well to the pricing practices of a lot of major retailers and manufacturers.

Indeed, the Chrysler promotion seems very appealing as gasoline approaches $4 a gallon. and would save the purchaser of a new Jeep Grand Cherokee about $2,700 over three years based on driving 12,000 miles a year with a combined (city and highway) 17 miles per gallon.

The savings for a more fuel efficient Honda Civic (although Honda is not offering a similar gas price promotion) which gets a combined 29 miles per gallon would be $2,108, so it seems as if the Jeep would be the better deal. The suggested retail price for the Jeep though is almost $30,000 and for the Honda -- just over $14,000.

The difference is a consideration of the price of purchase and the cost of ownership, the concepts behind the pricing strategy at Hewlett Packard in its sale of printers. HP, according to Andy Binder, director of sales and marketing, image and printing supplies (he has a fold-out business card to accommodate the long title), tries to appeal to both types of customers.

HP has a line of low-priced and high-priced printers and, according to Binder, its pricing policy “is driven by customer needs,” adding “we purposely tried to cover the whole gamut.” Computer printers – inkjet or laser – are frequently cited for the cost of ink and toner cartridges, to the extent that an “industry” has developed among third-party providers who either market compatible cartridges or kits allowing users to refill their own cartridges.

According to Binder, the alternatives either produce fewer pages per cartridge or lower quality prints.

Computer printer manufacturers aren’t the only ones who manufacture and sell products which rely on refills.

A lot of products suck us in with low shelf prices as the manufacturer makes its money on “maintenance.”

The Gillette Fusion Power Razor is a clear example. The online price for the razor – including one set of blades (and battery) is $11.99. A package of eight blades – cartridges – will set you back $27.89 -- $3.49 apiece. (That means the cost of the razor itself is about $8.53.)

Procter & Gamble, which owns Gillette, wouldn’t comment on the pricing or marketing strategy. A number of P&G cleaning products use the same pricing approach.

And then, there’s Amazon which follows the lead of the Apple iPod in marketing its new electronic book, the Kindle, introduced last November.

Amazon wouldn’t talk about its pricing strategy (neither would Apple), but Amazon President Jeff Bezos devoted his entire shareholder letter last month to the product. The strategy is working though.

“We had sincere hopes that Kindle would be well received, but we did not expect the level of demand that actually materialized,” Bezos wrote. “We sold out in the first 5 1⁄2 hours, and our supply chain and manufacturing teams have had to scramble to increase production capacity.”

According to Bezos, Kindle is a “purpose-built reading device with wireless access to more than 110,000 books, blogs, magazines, and newspapers.” A Kindle owner can buy a book directly from the device and receive it in less than a minute.

The Kindle retails for $399, a steep “price to purchase” hurdle. But individual books -- bestsellers -- cost $9.99 with many books priced lower. Magazine and newspaper subscriptions can cost as much as $15 a month.

There are some drawbacks: the device screen doesn’t light up although you can buy a light attachment and the design of the device is a bit awkward: I found myself accidentally pressing the large “next page” button. Although Amazon tried, to not let the device get in the way of the reading experience, there are limitations: when you buy a book for Kindle, you can’t lend it to a friend, even if the friend owns a Kindle.

I also confess to a bit of privacy paranoia -- wondering if when the wireless feature was engaged to allow me to receive a book -- Amazon tech gurus could track when I was using the device. According to an Amazon spokeswoman, the company can’t.

The Kindle thus is very much like the Apple iPod with a relatively high cost for the “hardware” but low cost for the software (the Kindle books or music for the iPod). As Amazon is starting to sell downloadable music to compete with Apple, the two companies compete for readers too. Amazon recently completed its acquisition of Audible.com which electronically distributes audio books which can be played on both the iPod and the Kindle. The cost of the audio books is less than the traditional paper versions, but more than the Kindle version. And, if you buy an Audible release for your Kindle, you get only the audio version, not the electronic print edition.

According to behavioral economist Dan Ariely, author of “Predictably Irrational” (and the owner of a Kindle) said price doesn’t seem to matter to the Amazon device customer. “It’s a question of gimmickry,” Ariely said.

He suggested the pricing of the music and books for the iPod and the Kindle was a major element in the success of the products.

“If the price of a single song or album [for the iPod] was equivalent to the store price, [the iPod] wouldn’t have done as well.”

Consumers, he said, use store prices as a “reference point.”

Mark Lieberman is the senior economist for the Fox Business Network. Prior to joining FOX, he served as first vice president at Washington Mutual, where he was manager of economic analysis and research. Before that, he served as senior vice president at Dime Savings Bank of New York (which was later acquired by Washington Mutual), where he specialized in credit and risk management. He has a degree in Economics from the Wharton School of the University of Pennsylvania.