Scam or Not?

For some time now we’ve been seeing ads on various cable channels promoting a membership retail operation calling itself “DirectBuy” which claims to be able to save its members huge amounts of money on furniture, home décor items, and home improvement materials. If you’ve seen these ads, you’ve probably wondered where the catch was; as previously noted in this space, companies do not exist for the purpose of simply giving you things (or money); they exist to make money for themselves. It’s not hard to imagine how a company that can actually sell you things for a fraction of retail cost could be wildly successful – provided that they are still selling those products for more than it costs them to obtain and sell the merchandise – but short of scams, bailout money from Congress, or outright theft, nobody out there is actually offering you something for nothing…

Of course, there are a lot of businesses, both retail and wholesale, that have done quite well for themselves using precisely this approach. As noted earlier this year, low-cost is simply one of the three generic business strategies, and common examples like Costco and Sam’s Club operate exactly this way. Moreover, there is a huge markup in some of these product categories (notably furniture, kitchen cabinets, and flooring materials) that warehouse stores like Home Depot are already exploiting to maintain their profit margins. It seems possible, therefore, that this offer might be legitimate. But as this post on the Consumer Reports website points out, in this particular case, there seems to be a bit of a grey area…

On the one hand, the DirectBuy people do charge a rather hefty membership fee; it’s generally between $4,000 and $5,000 USD for a three-year membership, and then $190 a year for each additional year. Even worse, it’s a high-pressure, one-time offer; sign on the dotted line right there and then, or you’ll never be allowed to come back. Thus, you can’t compare their prices to anything else in your market; you have to make the decision blind. There have even been reported cases of DirectBuy locations refusing to allow married people from taking the tour or listening to the pitch unless they bring their spouse – as is the case with timeshares and other high-pressure sales businesses, you generally need to get both spouses to sign or it’s too easy for them to get out of the contract…

On the other hand, a lot of the online comments indicate that if you purchase things that are normally characterized by extremely high mark-ups, it is possible to save significant amounts of money on the DirectBuy program. If you’re remodeling your house, or replacing all of your furniture (as would be the case after a fire or flood), or your business involves doing such things for your clients, this could work out very well for you. For the average consumer, however, it’s debatable if such a service would ever pay off. If you could realize a 10% discount on everything, you’d need to spend $50,000 to break even on the membership cost, and even at a 25% discount you’d have to plan on buying $20,000 worth of merchandise before this contract would be worth the effort. And that’s not counting the 6% handling fee, shipping fees, or local sales tax that will be added to your purchase…

In the strictest sense, we can’t really call this a scam – because it is possible to receive value in return for the money you’re spending, or even come out ahead on the deal. In much the same sense that selling someone a pneumatic nail gun for $1,000 when all they really needed was a hammer costing $25, this is simply a business model that plays upon people’s natural desire to get something for nothing in order to realize large amounts of profits from the gullible. The only truly unethical part of the operation is that the average consumer will never make back the cost of their membership fees – and the lengths the company is going to hide this fact in their advertising and sales operations…

I’ve noted before that there’s no law against making money off of the gullible and credulous – and that if there was, the economy would probably collapse. But you’re still not going to catch me doing business with any firm whose entire strategy is “Let the buyer beware!” any time soon…