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Guest Commentary: Our Principal-Agent Problem

Normally, the person making the buying decision is the person paying for that purchase; but, as we all know, this is not the case for everything we buy.

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Mandy Aguilar is regional vice president of Jacksonville, Fla.-based The Parts House. He is a regular contributor to Counterman magazine, where he writes about technology in his "Counter-Tech" column. Visit his blog at www.mandyaguilar.com.

A new school year started, and one of parents’ biggest fears comes along with it: how much money will I spend on textbooks this year? The price of textbooks for our children’s education can consume an enormous chunk of every family’s budget. The books are not only getting bigger, but they seem to cost more and more every year. They come loaded with DVDs, online licenses, maps and diagrams; however, all that extra knowledge does not feel like it adds a ton of value to our children’s education. Try carrying your kid’s backpack one day and you’ll see what I mean.

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I know from personal experience that parents have forged effective strategies to deal with the ever increasing cost of textbooks. Parents buy and trade used books – some even rent books online – and many have figured out a way to even let their kids go through an entire semester without buying the required textbook. This problem slapped me in the face after parents’ orientation night just a few weeks ago. My high school freshman son wanted to join an advance placement class on Human Geography. I was so proud of his decision to challenge himself, but that great feeling soon turned bittersweet when I learned that the course required textbooks cost $280! I tried all the tricks: used books, renting books, not getting the book; but, in the end, I forked up the cash like most parents do.

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I’m lucky to be able to pay for the textbooks; however, many families simply can’t afford them. And it’s no surprise, a government report on the increasing costs of textbooks revealed that their price has increased at a faster rate than cars and healthcare.

There is a very fundamental negative connotation with the way textbooks are sold: we all hate to buy something that someone else chooses for us. The school or teachers select the book, and we have no choice but to buy it. More times than not this leads to very expensive books chosen by teachers everywhere. The publishing houses and bookstores can set a higher price based on the fact that the teacher selected that one book for us parents to buy. This situation is not unique to textbooks; it happens in many other areas of our economy and without a doubt, all of them lead to some of the least satisfying experiences we can have as consumers. Think of doctors selecting your medicines. Lawyers deciding your legal strategy. Remodelers choosing your new appliances. And repair shops picking the parts to fix your car.

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Normally, the person making the buying decision is the person paying for that purchase; but, as we all know this is not the case for everything we buy. Think about the vehicle owner who pulls into a repair shop with the check engine light on. He engages the shop to fix his car; trusting that the repair they select for him will provide the needed fix, and he will pay for it without really choosing the repair.

This happens in our industry every minute of every working day. Economists analyze this situation using the Principle-Agent theory. It occurs when the “agent,” can make decisions on behalf of the “principal.” The principal is the consumer – the end-user – and the agent is the person or entity making the selection for them. In the case of our fictional repair shop, the technician selecting the parts is the agent and the vehicle user is the principal.

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The dynamic between agent and principal often leads to increased costs or at the very least, the perception of higher cost. Commercial transactions between agents and principals tend to be way less satisfying than transactions where the buyer makes all the buying decisions.

An agent that has a captive market can probably charge as much as they please and the principals will pay up. However, for businesses that must ensure repeat business from their customers, they must provide value to the principal at all times. In these cases, agents must create a value proposition that communicates quality, time-savings and peace of mind; only then the principal will pay without feeling that the option selected for them was too expensive.

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When was the last time you heard a friend say how inexpensive auto parts and car repairs have gotten? In our collective customer’s eyes, we are in an industry where goods and services are inexplicably expensive. The Principal-Agent problem permeates our industry, and we all need to work together to turn every broken down car into an opportunity to make a happy customer.

*Originally published in the October issue of Counterman magazine.

 

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