Trends In Consumption Patterns
Length: 1019 words (2.9 double-spaced pages)
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The business world is very susceptible to the subtleties of consumer choices. The ability to anticipate the trends in consumer consumption patterns is vital to any company desiring to be a leader or major factor in their industry. Millions of dollars are spent each year in research and analysis to determine or to create trends in, not only who the company’s customers may be, now and in the near future, but also, what will those customers want to buy, and why.
To truly understand trends in consumption patterns, one must first understand the basic principles of economics. Economics is the science that deals with the production, distribution, and consumption of goods and services (economics, n.d.). The branch of economics dealing with particular aspects of an economy, as the price-cost relationship of an organization is called microeconomics. This aspect of economics concentrates on the laws of supply and demand. According to Colander (2004), the law of supply states quantity supplied rises as price rises, when all other factors remain constant and the law of demand states that the quantity of a good demanded is inversely related to the good’s price.
When price goes up, quantity demanded goes down. When price goes down, quantity demanded goes up. There are several factors that lead to changes in consumption patterns thus a change in supply and change in demand.
Many believe that people buy things for their own self interest. Sales courses indicate the need to know this self interest because the customer really is not buying their product. The actual purchase is the benefit that the customer will receive from buying their product. Knowing this benefit would enable the seller to set pricing at levels that would ideally be the most beneficial for both buyer and seller.
The customer benefit could be anything. Satisfaction, pleasure, good will, fulfillment of a need are some examples of the benefit received, but are definitely not the only reasons people buy things. The level of benefit received from purchasing any product can be different from person to person, or from group to group. A single male in his early twenties may perceive a higher level of benefit from buying a flashy sports car than perhaps would a married man in his fifties. This level of benefit has been generally termed utility, and is further broken down into segments called marginal utility.
Assuming that money is no object, the purchase of a second flashy sports car may be more or less of a benefit than the benefit received from the initial purchase. The benefit, or marginal utility, experienced from each purchase would be grouped together as the total utility gained from purchasing the cars.
Having established the utility and, if appropriate, marginal utility involved in the sale of the product, the setting or changing of the price charged for the product needs to be reviewed. Changing the price structure for the product is likely to have an impact on the amount of product that would be sold once the change is implemented. This change is called elasticity, and is determined by dividing the percent change in the quantity sold by the percent change in price. A January 2001 article in the Business Communications Review on the telecommunications industry discusses both utility and elasticity for that industry.
The article shows that a 3% reduction in market prices that results in a 3% increase in sales volume equates to a demand elasticity of one (.03 volume/.03 price change). If the market volume were increased by 9%, the demand elasticity would be three (.09 volume/.03 price change) (Weingarten, Stuck, 2001). Any demand elasticity above one is generally accepted as an indicator that lowering prices could be beneficial to the seller.
At the time of this article, it had been asserted by a senior executive from a leading telecom service provider that the industry demand elasticity was in fact at three. This statement raised several questions as to the validity of the claim. Every calculation at the time placed the elasticity at one or less, proving that point was the financial trouble experienced by A T & T and WorldCom, both industry leaders. With a demand elasticity of three, simply lowering their prices should have greatly increased revenues and profits, yet neither company did so (Weingarten, Stuck, 2001).
The article states that there are two trend factors that drive telecom growth. First is population that was currently growing at the rate of 1% per year. The second factor was the increasing per capita gross domestic product (GDP), which at the time was rising at 4.6% nominal per year. The conclusion could be drawn that an increase in volume would occur regardless of any change in pricing structure. As these factors were not included in the calculations espoused by the executives, the results stated would be considered skewed (Weingarten, Stuck, 2001).
The article predicted the shifting to next generation networks (NGN) that would provide the availability of greater communication features for both businesses and individuals (Weingarten, Stuck, 2001). Providers have determined this desire as the current utility for the industry. This has proven true over the last seven years by the proliferation of cellular phones that take pictures, send/receive text messages, email capabilities, mobile internet access, and coast to coast walkie-talkie communication technology.
As with new products, the article predicted high demand elasticity for the next generation networks. Those flush with cash would likely pay the higher price to gain an edge on competition. Gradually lowering the price would make the technology and the utility available to a much broader spectrum of consumers. This price reduction should result in a greater sales volume than would have normally been experienced, and provide additional net profits. Consumers have already seen this benefit in the evolution of cell phone technology.
Colander, D. C. (2004). Economics, Burr Ridge, IL: Irwin/McGraw-Hill.
Economics. (n.d.). Dictionary.com Unabridged (v 1.1). Retrieved March 24, 2008, from
Dictionary.com website: http://dictionary.reference.com/browse/economics
Weingarten, M., Stuck, B. (2001). It’s a stretch to believe in high price elasticity.
Business Communications Review, Hinsdale. 31(1), 32. Retrieved March 23, 2008 from the ProQuest database.