From The Straits Times    |

What do the prices of lifts, coffee machines, and your printer have in common? We’ll find out, as we investigate the hidden costs in everyday purchases.

Some things in Singapore just aren’t as cheap as they seem to be at first glance. The key to clever budgeting is to look beyond the initial price tag.

1. Shavers, Nespresso Machines, Printers, and Lifts

The initial cost of a non-disposable shaver is fairly low. You can get a decent one for around S$14. The replacement razors however, are a killer – these can cost upward of S$30 a pack.

In this sense, shavers follow a business model very close to that of coffee machines, printers, lifts, and even phone lines.

Consider that, when you a phone with a line from M1, Singtel, or Starhub, the cost is heavily subsidised. There are even $0 deals, where you can walk away with a smartphone without paying. Why would they do this?

Because the real profits don’t lie in selling you the phone. The real profits are in the phone line. If you sign up for a phone line that costs S$60 a month, and pay it for two years, that’s around S$1,440. It’s far more than the cost of just buying the phone.

The same is also true for elevators: the cost of installing a lift is usually heavily subsidised. The company makes little or even no profit from it. But the cost of regular maintenance, along with replacement parts, are extremely high.

This is what caused the government to probe five lift companies for anti-competitive practices. They are the only companies in Singapore who can provide the replacement parts, and may have even collaborated to drive up the price.

Many businesses have learned to use this trick over the years: a product is given to you free or at a low cost. Once you have acquired it though, they know they can trap you into buying refills or continual service, and you’re just like a fish on a hook.

The next time you want to buy something, like a Nespresso machine, don’t just look at the price tag. Check out how much the coffee pods cost too.

2. Freemium Games and Software

“Freemium” is a variation of the method in point 1. This is usually in the form of web applications, such a graphic design app or mass mailer.

Most Singaporeans think they are too smart to be caught by freemium. They will never pay for the upgraded service, and they don’t need to pay to begin with. But let’s see how true that is.

Say you need a way to send your business newsletters into 2,000 mailboxes. You go online and find a free service that can do this for you, for free. You only need to pay if you want to send out to more than, say, 50,000 people.

The app is challenging, and it takes you many hours to figure out how to design and blast a newsletter. But you spend the time because it’s free.

See Also: How Free Games Like Pokemon Go Make You Spend Money

Over the next year or two, your business grows. Your subscribers grow to 10,000, 30,000, and one day hits the magic figure of 50,000+. You will now need to pay to use the previously free app.

Will you?

Almost definitely, and here’s why: you’ve spent hundreds of hours mastering this exact app. You’ve saved templates in it, scheduled newsletters with it, and built long lists of customer emails with it; and you are not going to learn how to do the same thing all over again with another app.

This is called “user inertia”, and it applies to many other forms of business too.

For example, there is a running joke in the finance industry that people change their wives more often than they change their banks. You see, no one wants the hassle of opening of new accounts, remembering new passwords, getting new cards, etc. So they may stick with a bank, even if they get a bad deal.

(That’s why at SingSaver.com.sg, we constantly try to get you to compare, and make switching your credit cards and personal loans easier.)

This is the hidden cost of freemium products and services. You may think you’re clever enough to dodge the price, but statistics show you’re probably wrong (or else MailChimp and Twitter would be out of business). The only way out?

Don’t be lazy! Try something new if it would save you money.

3. Free Trading Algorithms

These are programmes where an algorithm buys and sells shares, Forex, or some other asset for you. They are allegedly coded by top quants (people who study data in finance) and top programmers. They make you returns while costing nothing.

Well, in theory.

The people making these algorithms don’t work for free. They expect to get paid. And they do this by taking a fraction of any winning trade. For example, if the algorithm makes you S$200 on a trade, they may take S$20.

But it’s still free to you right? Where’s the complaint?

Well, consider whose money is being traded. The algorithm takes money on a winning trade (basically payment), but it doesn’t put back money when it makes a losing trade.

To use an analogy, imagine you play a game at the jackpot machine. Every time you win, I scoop up some of the earnings. Every time you lose, it’s your money being lost. That would be a similar arrangement to most of these free algorithms.

That’s not to say they’re all scams, or that they can’t win – but you have to be aware that “free” is a misleading term. You are being charged for using the algorithm, and the greatest cost is that your money is at risk. You can potentially lose everything you put into it, up to a programmed cut-off point (most of these algorithms are programmed to stop trading after reaching a certain loss).

Nor are the charges cheap. Many of these algorithms take as much as 10 per cent off a winning trade. This can be much more expensive than the cost of a mutual fund, in which the expense might just be two per cent (or less) of the portfolio managed.

4. Free Furniture Transport and Delivery

How could you possibly get free delivery for a whole TV or a giant bed? It would cost you well of S$300 if you pay the drivers yourself. And yet the store has kindly absorbed the price for you. Isn’t that kind of them? It must be a savings of hundreds of dollars.

The truth is, you are paying for delivery, even if the store says free delivery. With few exceptions, every furniture or electronics store simply folds the cost of the items into the purchase price.

The price tag of an HDTV, before it gets to a store, might only be around S$3,000. But then it rises to S$500 because the store has to cover marketing cost, and then S$700 more because the store has to pay the sales commissions, and then S$200 more because it takes up storage room, etc. The eventual cost may be in excess of S$10,000.

Somewhere in that process of adding up the cost, you can bet transport was factored into it.

So when the salesperson throws in free delivery, you have reason to be a lot less grateful. Odds are, you’ve already paid for it. Bargain for something else, like a free extended warranty!

5. Budget Flights

Budget flights are notorious for hidden costs, you know that already. But forget the little things like paying S$5 for a sandwich. The hidden cost you really need to worry about are airport taxes.

Airport taxes vary from city to city, but they typically range up to S$300. In some cases, it can go as high as S$600. Sometimes, you will see a budget airline post an absurd price for a ticket – for the price of a mere S$25, you can fly to Australia.

Many buyers of that ticket will indeed be charged S$25. And then S$300 more for airport taxes. There’s no point getting irate at the airline for it either. They’ll say they’re not the ones charging you, they airport is.

See the trick? In most situations, the airline pays for the airport taxes, and rolls it into the price of a flight ticket. A promotion with an eye-popping price occurs when they simply exclude the tax from the ticket price, and leave you to pay it yourself.

It’s an instant discount of more than 80 per cent, and by all legal definition it’s true.

Maybe you can demand a refund. But given you’ve already planned your trip, and are standing at the airport with your luggage, what are the odds you’ll give back the tickets for S$25 and go home? We all know you won’t, and so does the airline.

If you really want to avoid these shenanigans, stick to a tried and trusted route. Get an air miles credit card with a proven reputation, and trade in those miles for free upgrades or tickets. You can find them on SingSaver.com.sg.

This article was originally published on SingSaver.com.sg, the fastest growing personal finance comparison site in Singapore. Click here for the original article or visit the comparison site for more.