Laura Rowley Money & Happiness

My first New Year's resolution is to save more money this year. My second New Year's resolution is to remember that you get what you pay for.

Or, as recent research has found, you get what you think you paid for.

Drinking the Kool-Aid

All of us judge products based on our beliefs and expectations, which have been shaped over time by experience. For instance, many consumers have developed an expectation (conscious or unconscious) that cheap products and services will be less effective.

Dan Ariely, a professor of behavioral economics at the Massachusetts Institute of Technology, decided to test if perceptions of price could actually have physical effects on consumers.

In a study published in the Journal of Marketing, he and two co-researchers gave 38 members of a fitness center a sports drink before and during a workout session. They showed all the participants the list of ingredients, and told them the drink was from a recently manufactured batch.

One group was told that the sports drink had been purchased at the regular price of $2.89 a bottle. Another group was told it had been bought at a discounted price of 89 cents per bottle. Those who received the discounted drink rated their workout intensity as lower, and reported being more fatigued than the people who received the regular-priced drink.

Price Doesn't Equal Quality

Separately, the researchers gave SoBe Adrenaline Rush (a drink that claims to help boost mental acuity) to participants, and then had them solve a series of puzzles for 30 minutes. Again, one group was told the drink was discounted.

"People who paid a discounted rate solved fewer problems," Ariely says. "Price discounts lead to an unconscious behavioral effect."

In other words, if you're a true believer, a product can actually have a placebo effect. This phenomenon may explain why, as the Wall Street Journal recently reported, there is virtually no price resistance in skin-care products, despite a total lack of independent clinical trials of their effectiveness.

In one case, shoppers put their names on a waiting list to pay $350 for a 1-ounce bottle of Dior anti-aging cream at Saks. Meanwhile, a recent Consumer Reports study of anti-wrinkle creams ranging from $18.99 to $335 found Proctor and Gamble's Olay Regenerist to be the best among nine surveyed. Its price? Less than $20.

In Style magazine's October issue also jumped on the price-quality bandwagon with a story called "Buy Quality, Cry Once." It featured clothing, shoes, and handbags purportedly worth a pricey investment. A reader subsequently wrote that the story "convinced me I should splurge on the $500 boots I've been eyeing... Thanks for all the help."

Bargain Hunting Prevails

Some help. But the phenomenon extends beyond sports drinks and boots to something far more costly -- education. The New York Times recently reported that a number of colleges and universities have raised their prices without altering their academic offerings. The result? Enrollment boomed.

At Ursinus College, a liberal arts school in Pennsylvania, the board voted to raise tuition and fees 17.6 percent in 2000 to $23,460. Within 4 years, the size of the freshman class had ballooned by 35 percent, as applicants concluded a higher price must mean a better education. Meanwhile, the school raised student aid by nearly 20 percent, meaning most of its student paid less than half-price.

The bottom line: Even people who think price equals quality still love getting a deal. When I interviewed consumers for a book I wrote about the Target Corporation, they consistently mentioned how smart they felt buying designer trends at a cheap price.

I agree; bargain-hunting makes me feel like a savvy consumer. My experience is that you can often get the same quality for less money if you do a little homework.

A Quality vs. Price Wake-Up Call

Ariely says it's all about what you believe. "If you expect everything at Target to be great -- much better than Neiman Marcus -- then there's no problem," says Ariely. "It's only if you pay cheap and subconsciously expect it to be worse -- it will be worse."

I'm wondering if Ariely's findings explain why I'm so mad at Vonage, the Internet phone company. Given my positive experience with discounted services -- such as finding travel bargains on the web -- I subconsciously expected Vonage to be just fine, and save me up to $300 a year on phone service.

Wrong. I initially spent more than 40 minutes on the phone to order the service, which should have been a red flag. Then the Motorola Voice Gateway box arrived, which had to be connected to my router. I procrastinated for nearly a month, because I didn't expect to have to install my own phone service and was a little daunted by the hardware.

My delay caused a problem with transferring my phone number from the old telephone service, which meant I had to pay for both services until the transfer went through.

A Cheap Lesson

That's when the quality issues began. I might as well have been calling from Mt. Everest -- the sound was tinny, people had difficulty hearing me, and the calls simply dropped out, sometimes as often as three or four times a day. Other times I'd pick up the phone to make a call and couldn't get a dial tone.

Next, I got a bill from my old phone company for an additional month of service; they claim Vonage never contacted them to let them know the number transfer went through. There were more hassles to straighten that out.

In November I'd had enough, and dumped Vonage. The company claims I never called to cancel the service, and billed me through January. Despite a lengthy conversation with a supervisor, Vonage wouldn't provide a credit. Then they charged me $39.99 to cancel the service.

Bottom line: With all the extra charges, I paid about $50 a month for six months of service, a savings of about $100. But the time and aggravation totaled much, much more.

As I try to save money in the New Year, I'll consider Ariely's work, and address my unconscious bias toward getting the cheapest possible deal. I'll consciously seek quality first. But whenever possible, I plan to get it at a discount.