What Are the Approaches in Consumer Behavior?

he study of consumer behavior attempts to demonstrate how individuals make selections while shopping. It examines the reasons behind those choices. The idea is that once a company can identify why one product is preferred to another, it can work to improve, or change the marketing idea around the less favored item in order to increase its appeal to consumers.

Ordinal Utility

Ordinal utility is founded on the idea that consumers have basic, rational preferences, and they make their decisions based on these preferences. The actual degree of the preferences is not measured or measurable; only the actual rank is considered important. For instance, if you watched a consumer choose to purchase Cheerios over Frosted Flakes, you could observe that he ranks Cheerios as having a higher ordinal utility. You could record how many people prefer Cheerios to Frosted Flakes, but ordinal theories would say that you could never determine, numerically, how strong the Cheerios preference is.

Cardinal Utility

Cardinal utility attempts to understand the degree of consumer preferences by measuring this degree in terms of differing value. For instance, in your Cheerios observation, if you offered a box of Frosted Flakes that contained twice as much product for the same cost and the consumer still chose Cheerios, you could then say that the preference is at least greater than twice the value of Frosted Flakes. In this way, cardinal theorists attempt to show how consumer preferences are based on overall value and utility of a product, ideally to suggest a rise in offered product of certain brands to influence consumer behavior.

VNM

The Von Neumann-Morgenstern Utility Theorem attempts to combine ordinal and cardinal utility theory with four state theorems, beginning by stating that an individual does have a specific set of preferences. Second, it is assumed that those preferences are consistent across multiple options. Third, there is a point at which value can make a lower choice worth more than an initial preference. Finally, each consumer has her own utility equation, even if it seems arbitrary, that influences the utility functions for her independently.

Convenience

Convenience, as a consumer quality, shows the difference between these theories. If you consider convenience an ordinal quality, it can become a primary ordinal quality as consumers begin to make choices not between products, but between potential products

within the category of convenience. Similarly, cardinal theorists suggest that convenience plays into the overall utility of a product, raising the overall utility of more convenient products in order to compete with items of lower convenience. Alternately, a VNM theory suggests that at some point in quality, the convenience of a product is no longer enough to convince consumers to purchase an inferior item.

What Is the Meaning of Marginal Utility?

Utility is the satisfaction derived from the consumption of a product or a service. It is the ability of an item to fulfill a human want. Marginal utility is the extra satisfaction derived from consuming an additional unit of a product or service. It is an important concept in economic theory, on which the law of diminishing marginal utility is based.

Definition

According to Richard G. Lipsey and Colin Harbury in the book Business & Economics, marginal utility is the change in total utility by the consumption of an additional unit of commodity.

Concept

Individuals consume goods and utilize services for the satisfaction or pleasure derived from them. The term "utility" is used by economists to describe the amount of pleasure derived from the consumption of services or goods. Utility is a subjective term and its vary differs between people, depending on their individual preferences. The theory of marginal utility was introduced by the economist William Stanley Jevons (1835 1882).

Types

According to T.R. Jain and O.P. Khanna in the book Business Economics (For BIM), marginal utility can be positive, negative or zero. Positive marginal utility is when the consumption of every addition unit of item increases the total utility derived from it. Negative marginal utility is when the consumption of every extra unit decreases the utility derived from it. Zero marginal utility is when the consumption of extra units of items have no change on the total utility. This is the saturation point, or the point at which the total utility of an item is maximum.

The Law of Diminishing Marginal Utility

According to Walter J. Wessels in the book Economics, the law of diminishing marginal utility states that marginal utility decreases as more units of a product or a service are consumed. This can be explained with the help of an example. Consuming a single glass of water on a hot summer day will satisfy a person's thirst, and he will derive

utility from it. A second glass of water will not hold the same significance as the first but it will still be valued. The third and fourth glasses will not bring additional utility: instead, the total utility derived from their consumption will be less than that derived from the consumption of the first glass. This example reflects the economic law of diminishing marginal utility, which states that the more of a good consumed, the smaller the increase in utility derived from it will be. The marginal utility decreases with each additional glass of water consumed until the drinker experiences negative utility, or disutility.

Importance

Marginal utility is an important economic concept because it determines how much of an item a consumer will buy. It is an abstract measure of happiness or satisfaction derived from a good or a service.

How to Calculate Diminishing Marginal Utility

Diminishing marginal utility is a term used in the field of economics. Utility is the idea of quantifying satisfaction. The unit that is used is called a util. The thought behind diminishing marginal utility is that the level of satisfaction of consuming a good decreases as each additional unit of the good is consumed. As a result, people consume a variety of goods and services rather than just one. Marginal utility is a concept that can be calculated, and through its calculation one can understand the concept of diminishing marginal utility.

Instructions

1. Calculate Marginal Utility

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Collect marginal utility data. To do this, set up a table. One column for consumption level of a good, one column for the utility at each level of consumption and one column for marginal utility. Go to amosweb.com and search marginal utility. They have a rollercoaster experiment as an example. Use their figures if you don't have your own. Another table with data you can use will be found at investipedia.com. Their example is with chocoloate. Search, "Utility" to find it.

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Input data to the formula to calculate the marginal utility at each level of consumption. The marginal utility formula is the change in utility divided by the change in level of consumption. If you use the roller coaster example, the change in consumption level is always one because you can only take one ride at a time.

Fill in the marginal utility column by using the formula. You will see that the marginal utility decreases as the level of consumption increases; this is diminishing marginal utility. Think in laymen's terms. The more a person rides a roller coaster the more sick, bored, dissatisfied they are likely to be. For most people, one ride per coaster is plenty.
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Graph your results. Make the horizontal axis of your graph the consumption level, and the vertical axis your utility level. You will see when you connect the dots that they form a curve. This is the curve of marginal utility. The slope (rise over run) of this curve represents the change in marginal utility. This also represents diminishing marginal utility, as the curve will show a negative slope.

Tips & Warnings

Utility is a rather abstract concept in economics. The calculation of it can be rather complex and is reserved for upper level courses. For basic understanding of the Diminishing Marginal Utility theory the changing level of utility is provided.

Uses for Aggregate Utility Curves

A utility curve -- more frequently called an indifference curve -- which describes the utility function, is a graphic depicting consumers' preferences. It is a conceptual framework, giving economists a tool for analyzing consumer response to quality and quantity of goods. Just because it is conceptual and subjective in some ways doesn't mean it's not real; consumers respond positively to some product quality/quantity mixes and relatively poorly to others.

Aggregate Curves

Single indifference curves compare two or more quality/quantity mixes of the same product, or perhaps, mixes of two products that result in equivalent consumer responses -- for example, a consumer might be just as happy buying one carton of great ice cream for $10 as they would two cartons of decent ice cream for $5. Aggregate curves don't just look at one or two players in a market; they look at entire sectors or the whole economy.

Observe the Overall Trajectory

If you track the evolution of one product line, the latest product is introduced and consumers respond well, you may not know how much of their response is due to the quality of the new item, the price or to factors in the economy at large. Comparing your

single utility curve to an aggregate curve or, better still, aggregate curves over time will show you the overall trajectory of consumer behavior.

Triangulate the Contour of the Market

Just as it's hard to look at the utility curve of one product and extrapolate the behavior of the whole market, it's difficult to look at the movement of the whole market and glean insight into a single product. However, comparing the two can give you usable information. For example, consider an aggregate utility curve that includes every product sold in grocery stores. Look at it today and one year ago. Break the data into categories like pasta, cereal and soup. Make the same analysis for each category. Do the same for each product. You'll find the aggregate curves give you the overarching shape of the market; comparing them to more specific curves can show you the detailed contours of the market.

Isolate Anomalies from Trends

An important use of aggregate curves is to discern the cause of market shifts. For example, shifts in a variation of a product, relative to the standard product, might show that consumers like the new product better. An aggregate utility curve can help isolate a small shift in consumer behavior, or even an anomaly from overall market dynamics.

Consumer Behavior Basics

Advertising and marketing strategists rely on a four-step process for consumer behavior that dictates product marketing strategies. These behavioral patterns, in conjunction with post purchase behavior, can help companies market a product more effectively by targeting each stage of the consumer decision-making and purchasing process.

Identification of Problem Or Need

Identifying a problem or need is the first behavioral step in consumer buying behavior. Something is broken and needs to be fixed or replaced, or the consumer has determined a need or want. This stage of the consumer behavioral process offers little opportunity for marketing or advertisers.

Research

Research for information is the behavioral phase when the consumer looks for a solution to an identified problem or begins looking for options. At this phase, consumers have not

begun evaluating. There are different levels to this phase behavior. While some consumers may be more thorough and compile every possible option, many consumers will not spend as much time on research and will likely stop searching after finding the most visible product or service. The latter group of consumers is likely to go with the most well known, without further evaluation.

Consumer Evaluation

More thorough consumers are likely to compare prices, availability and other options, such as warranties. Consumers may read reviews of a product or service, and even compare prices from one store to the next. These customers will be more inclined to need convincing. A product or service won't sell itself on name or popularity alone.

Purchase Decision

The last behavioral phase of the buying process is when a decision to purchase is made. Advertising and marketing at this phase will focus on add-on sales to the purchase to maximize income. The initial product has been sold and the marketing strategy from this point is to build and maintain customers.

Behavior After Purchase

After purchase consumer behavior ranges can include satisfied customers spreading the word about a product or service or consumers who write reviews, whether good or bad. Satisfied consumers will likely purchase products or services that serve their needs, especially those who invested a great deal of time in finding the right product.

Influencing Factors

Consumer behavior is not an exact science. Advertising and marketing specialists are always looking for ways to control it. Environment, friends and family, upbringing, media and role models can all play a part in the influence of consumer behavior.

What Factors Affect Consumer Choices?

Consumers are presented with a variety of products and services to choose from in today's market. Several factors influence a consumer's purchasing decisions. They include psychological behaviors, family dynamics, social classes, and the buying process. These factors help advertisers create successful marketing campaigns that catch the eye of the consumer.

Psychological Behaviors

To successfully advertise a product or service to targeted consumers, companies should first determine their consumers' needs, which may include a desire for safety or to belong in certain groups. This analysis is helpful in understanding how a product is

perceived by consumers. Consumers are also known to purchase a product or service based on factors such as their personalities, lifestyles, and motivations. For example, people wanting to prevent skin cancer may opt to not use tanning beds and instead wear the proper amount of sunscreen.

Family Dynamics

Many buying decisions are based on the family dynamic. Determining who makes the purchasing decisions for a family is essential to successful advertising of a company's product or service. Newlyweds with no children might purchase an affordable small car rather than a more expensive family car. A one-person household may purchase groceries in smaller packages because it has no one else to feed.

Social Classes

A buyer's social class determines the quantity, quality, and types of products or services that may be purchased. Age, race, religion, location, and socioeconomic status are all factors that influence social class. Men of low socioeconomic class will likely purchase jeans and shoes at discount stores such as Wal-Mart or Target. African-American women are more prone to subscribe to Essence magazine due to their race being its target audience.

Buying Process

Before making a purchase, a consumer must have a need. For example, hunger requires a need for food. After determining his or her need, a buyer must research information on the product in question and compare other brands to determine which one will bring the most satisfaction. A purchasing decision is frequently based on factors such as the product's packaging, cost, and benefits. A person may benefit from fast food if a person needs food quickly and needs to be frugal with money.

Why Do We Need to Understand Consumer Buying Behavior?

Understanding consumer purchasing behavior is most important for a business's marketing department but can also bear fruit for its line departments. Optimizing a business's product design and sales programs cannot be done without understanding what it is that drives potential consumers to purchase certain products over others.

Marketing Analysis

Marketing processes begin with analyses of consumer needs and desires in relation to how business operations can be used to sate those qualities and thereby produce a profit. Such analyses are used to identify the opportunities for profit offered by potential consumers to businesses and cannot be done without an understanding of both sides in

the business-consumer relationship. Since consumer purchasing behavior is core to the consumer side of this relationship, it is one of the most important parts of conducting the initial analysis of business opportunities.

Marketing Strategies

Once business complete their analyses of opportunities available to them, they can begin implementing strategies to take them. Strategies are the plans of action that businesses use on a general basis -- what segments of the population to sell to, how to introduce the product to them, and whether other segments can also be persuaded to purchase the product. Understanding consumer purchasing behavior is an important part of targeting the right group of potential consumers and thus ensuring venture success.

Marketing Tactics

Once businesses decide on a plan of action to target specific consumer groups, they can then decide on the tactics or the actual steps needed to implement those plans. Businesses intent on targeting new consumers must decide the prices at which they will sell their products, how to get their products from production to the stores, and even design the product with the optimal features to lure in consumers. All of these decisions require understanding of consumer purchasing behavior to produce effective and efficient results. For example, businesses cannot select the most suitable sales models without knowing how their target consumers purchase the goods and services used in their daily lives.

Marketing Implementation and Control

The last step in the marketing process is actually carrying out the decisions made earlier and correcting over time to adjust for problems and unforeseen issues. Since this process of implementation and management covers all previous steps, an understanding of consumer purchasing behavior retains its importance even here in the last step of the marketing process.

How to Measure Consumer Behavior

Measuring customer behavior is a crucial part of any business. Knowing what the consumer wants and how he acts is vital in terms of product design, and later marketing. There are different ways that you can measure consumer behavior, depending on what area you are interested. Regularly conducting market research will allow you to get to know your customers, which will mean you take them into account when making business decisions. This will greatly improve your business, and your profits.

Instructions
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Conduct a survey to find consumer behavior. There are two main types of consumer survey: qualitative or quantitative. Qualitative studies involve asking a few consumers a lot of in-depth questions. Quantitative studies involve asking lots of consumers a few questions. The latter would be better for determining the market for a totally new product, since you only need to find out if people would buy it. If you are amending a product, or making one similar, a qualitative study would allow you to gain more detailed information.

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Observe consumers going about their business. You will need to get permission from the store or the shopping mall you are observing. By watching consumers, you can discern a great deal of information about their behavior. Information such as optimum height and location of a product and store layout is all gleaned from obervational consumer behavior measures.
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Use raw data to provide a measurement tool. For example, if you have released a product, see if this is bought regularly in conjunction with another product. If it is, then you can assume that you have a similar demographic to the second product. Use the raw data to determine what time of day, or weather, or time of year people buy your product. All of this gives information on consumer behavior.

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Separate objective and subjective data. If you are leading an interview or survey, you may be influencing people's answers. By gaining as much data as possible, you will be able to make objective judgements, which are free from bias, whether inadvertent or not.

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Have a clear question in mind. Consumer behavior measurements and any form of market research functions best when a specific question is kept in mind. Essentially, you should measure behavior based on the answer to one question, be it broad "What is our consumer demographic?" or focused "Should our price be $4.99 or $4.50?"

What is the Cardinal Theory of Consumer Behavior?

The cardinal theory of consumer behavior assumes that all consumers make decisions based on the potential utility of their purchases. While utility is a subjective evaluation, it refers to the overall feeling of satisfaction from the purchase of items. The theory

suggests that consumers will examine their purchases, searching for the most utility that they can get from an item, with respect to the cost of the particular item.

Human Want

Individuals have an unlimited sense of want, expanded consistently as new products enter the market and as individuals discover new needs and wants. Markets can create new wants and as individuals change, and as their needs change, they will find new necessities of which they were not previously aware. Additionally, the concept of human need and human want are almost interchangeable for the purposes of consumer behavior because consumers make preference choices even with their needs based on the same sense of want satisfaction. For instance, if you go to the store because you need new shoes, a need purchase if they are your last shoes, you will make your purchase choice based on the shoes that will maximize your overall satisfaction.

Utility

Stanley Jevons developed the utility concept of the cardinal consumer theory in the mid19th century by defining the utility of an item by its ability to satisfy human want. He continued to explain that utility is subjective in nature and that it differs from individual to individual. Jevons also explained that utility is different from the quantity of pleasure that it gives because utility takes into account overall satisfaction, which includes quality of the item, price of the item and the feeling you get from owning the item.

Resource Limitation

The cardinal theory of consumer behavior recognizes that each consumer works off of a limitation on resources, specifically a limitation on money. This resource limitation requires consumers to make utility choices with a strong consideration for price. The result is a theory that suggests that a higher quality item, or item with greater utility, will be favored by a consumer if the higher price is justified by his limitation and his faith in the increase of quality.

Assumptions

The first assumption of the cardinal theory is that consumers will act in relation to reason and make conscious decisions. It also assumes that utility is measurable and quantifiable, even if this is done in subjective ways, such as asking consumers to rate the quality of an item on a scale of one to ten. Additionally, the theory assumes that utility decreases as you purchase items. For instance, a gallon of milk may be a bargain at $3.00, but the utility of the milk decreases with each additional gallon that you buy until eventually it provides no new utility for additional gallons because you expect them to begin spoiling.

What is the Cardinal Approach in Economics?

The world of economics is filled with multiple schools of thought. Each approach has its own merit and unique view on economics. One approach is the cardinal approach in economics.

Cardinal Approach

The cardinal approach is a consumer-centered view on utility. This economic approach asks the consumer which utility the consumer receives from purchasing a certain good or service.

Theory

The theory behind the cardinal approach came from the economic utilitarians of the 19th century. The economic utilitarians were concerned about the utility, or personal worth, of goods and services. They wanted to measure demand and the value of a good and service through quantified, utility measurements. Hence, the cardinal approach was developed to reveal how people in a market view the utility of a good and service on an aggregate level.

Plausibility

For all its theoretical and teaching benefits, most economists do not endorse the cardinal approach since an aggregate view of utility could never be actualized in a market. An economist would have to find out how every person in a market views an utility and then determine the good's aggregate demand value. However, for students learning economics, the basics of the cardinal approach helps them understand utility and demand.