Being Cheap vs. Being Frugal

Many people confuse between being cheap and being frugal. So what’s the difference between the two? I’ll borrow a simple table from another article.

In summary, being cheap means using price as the only metric for determining whether a particular product or service is worth spending on. The problem comes from the fact that this seemingly objective criteria is still quite subjective.

What may seem frugal to you may still be thought of as cheap to another and that’s because we all have different utility functions, i.e. hold different priorities on what we deem are worth spending on. One example that stands out for me is clothes. I know of people who have set aside a monthly budget for new clothes because they see the utility in that. On the other hand, given that I’m not growing or shrinking in size, decade-old clothes can still look good and are perfectly usable to me albeit slightly out of fashion, and I have a wardrobe full of them that I am in no hurry to replace. Moreover, a post-COVID world means that going-out or even work clothes are used less frequently too. There was even a period where our washing machine was faulty for an entire month and I could get by with all my existing clothes without having to do laundry. So clothes to me are a lot less important and I place a much lower utility on them.

And then there are also many who use price as a proxy for quality, i.e. high price implies high quality, which may be true sometimes but is not always true either. In academic parlance, this is known as the Price Quality relationship. In Singapore, sometimes we say “You pay peanuts. You get monkeys.” The earliest study of this price-quality relationship was by Leavitt in 1954, who observed that higher priced brands increased buyer’s readiness to purchase them than those with lower prices. Over the years, many other researchers looked at this relationship in different settings – consumer products, wine, concert tickets, etc. – and some found it to be statistically significant. Makasi and Govender (2014) studied the influence of price on quality inferences with a literature review and made the following conclusion on the placebo effect of price on quality:

Even when the price paid for goods or services has absolutely no relationship to its actual quality, consumers’ non-conscious beliefs about the price-quality relationship change their actual experience with the product. (…)

It is becoming increasingly apparent that consumers frequently employ price as a proxy for
product quality, giving rise to the concept of marketing placebo. Management is thus recommended to use knowledge of this concept for product branding, promotion and pricing in order to maximize profits and improve organizational performance.

Makasi and Govender

The simple way to put it is that price is not always the best indicator of quality. High quality products may be expensive, but not all expensive products are of high quality. Sometimes, we are just being ripped off.

To be honest, I’ve been accused of being cheap more than once. I used to take it personally but now I don’t really bother anymore. It makes life a lot less stressful by not caring too much about what others think, so long as I’m clear about my goals, my priorities and my purpose of doing certain things in certain ways. I guess it also helps that the literature also says that I’ve been vindicated.


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