Where Do You Spend Your Money?

By: Andrew Lak

Consumer’s wishes and wants are revealed by their spending habits, and how they allocate these expenditures has been an ongoing concern in marketing research. But why do consumers change their spending habits? Could the economy play a role in consumer decision making, for example, in a recession or expansion? These questions were answered in an article from the Journal of Consumer Research: “How Economic Contractions and Expansions Affect Expenditure Patterns,” by Wagner A. Kamakura and Rex Yuxing Du (http://jcr.oxfordjournals.org/content/jcr/39/2/229.full.pdf). They tested differences in household spending when the economy was in a recession and in an expansion. Their results were, overall, consistent with the two hypotheses they presented:

“Hypothesis H1: In a recession, positional goods are likely to see decreased budget shares and non-positional goods are likely to see increased budget shares and the opposite takes place in times of economic expansion.

Hypothesis H1a: In a recession, nonessential goods (not needed for day to day living) that are consumed in more visible circumstances are likely to see decreased budget shares, and essential goods that are consumed in less visible circumstances are likely to see increased budget shares; the opposite happens in times of economic expansion.” (Page 4)

They tested the hypotheses in more than 30 major expenditure categories from 66,368 US households, over 2 decades (1982-2003), covering 3 recessions (Page 2) (Please see table 4 in the article link for the categories). To test them, they used a mathematical model to project how consumers would react based on the economy improving or worsening and how this economic change affects their expenditure allocations. For their second hypothesis, they considered more detailed information based on several different scenarios and the actual fluctuations in the expenditure categories. The scenarios were designed to reflect an increase or decrease in GPD and a reduced consumer budget. This was an easy to understand model in which we can get more detailed information on what expenditures consumers would decrease and increase based on “life-like” scenarios. The conclusions were that consumers gain additional value from consuming the same amount of a certain good, if they see others consuming less of it. This suggests why, during a recession, consumers reduce their expenditures on nonessential and visible goods even when they do not experience a reduction in budget (page 17). More visible non-essential (positional) goods become less desired in a recession, while less visible essential (non positional) goods gain in relative desirability during a recession (page 17). Consumers’ decisions and how they allocate expenditures is directly related to the increase/decrease in GDP.

This model has potential to make a difference for marketers. They can take economic trends and use them to their advantage by implementing effective marketing campaigns that adapt to a fluctuating economy. Also, it shows how consumers react in specific ways to economic trends, where for example, if there was a recession, consumers may cut back on jewelry and watches, but when the economy picks back up consumption of jewelry and watches increases dramatically. It would not be ideal to reveal your most expensive niche brand during a 3 quarter recession; perhaps, when consumer budgets are increasing, it would be a better time to launch such a marketing campaign. It will provide a more cost effective and more efficient campaign based on the economy. This gives marketers another tool to use when developing their marketing strategy.

There is also room for additional research to establish the relationship between other external factors and consumer decision making. This is a great stepping stone to help understand other variables that may impact a brand. Without considering environmental factors, it is difficult for a marketer to understand how or why a brand could be deteriorating compared to projections, and the adjustments needed to bring it back to success. Having greater understanding of these variables and how they all play a role into the marketing strategy should increase the gross profit for any company.

I would have to agree with this analysis. From personal experience, when the recession hit I personally became more aware of non-essential goods and how I could more efficiently use my consumer budget. For example, going out to eat or buying new home furniture was not the best idea, and having a few drinks at home was cheaper than going out with friends. Also, investing was not a good idea at the time, for the stock market was unstable, and I preferred to save in a more secure type of commodity, thus reducing my consumer budget.

I do not agree with some of the findings in the article though. In their “Counterfactual Analysis” scenario in which GPD dropped by 2%, they discovered that tobacco increased, charity increased (dramatically), and medical prescriptions dropped. I feel like I would save more by not spending money on tobacco and, perhaps, take care of my health with buying my needed prescriptions. I can understand how charity did increase by 35%, for people want to help out those in need during hard times. Perhaps there needs to be more detailed research to see why these trends exist (please see table 4 in the article link for the categories and their trends).

In sum, this is a new area of expertise in which marketers should be putting more emphasis on continuing to perfect their marketing strategy in the context of various environmental situations. I feel that companies that use this type of model, taking into account environmental variables, will be ahead of the competition.

 

Advertisements

9 thoughts on “Where Do You Spend Your Money?

  1. Melissa Miller December 1, 2015 / 3:58 pm

    I think it is very important for marketers to keep up with the current news and trends of the economy. During the recession consumers had limited to spending and had to spend their money on their needs and not necessarily their wants. This is important for marketers who market products that are considered not a need and more of a luxury good. To promote a product during a time where consumer spending is low, will not produce the results they are looking for. They have to be aware of these trends so they can promote these products during a time when consumers have the money to buy the product.

    Like

  2. Sam Velonis December 1, 2015 / 6:04 pm

    I absolutely agree with you, Melissa. It’s very important for marketers to adapt to economic trends in order to be successful. Hypothesis H1a makes perfect sense to me. If consumers have less disposable income they are less likely to spend money on nonessential goods when things are tight. The article goes to show how significant a role timing plays in marketing and how it can be seen as both an advantage and a disadvantage depending upon the individual situation and the current state of the economy.

    Like

  3. Matthew E. Dulac December 2, 2015 / 6:57 pm

    In order for companies to be successful, they must not only offer products or services that are better than the competition, they must also keep up with the times and the economy. In the recession of 2008, it can be seen that many companies had to change their product lines or their marketing campaigns when a large amount of people did not have the disposable income that they previously had to spend on wants vs. needs. For luxury brands like Rolex, they had to change how to market and find out ways to continue to sell their product when not as many individuals could afford it. This is the difference between companies that appreciate and companies that depreciate in times of hardship.

    Like

  4. James Wegman December 4, 2015 / 1:42 am

    I agree with you Andrew, as well as with everyone in the comments. Both hypotheses are great! Marketers must be able to look over trends in the environment and economy. you can’t promote something where there is no spending. You would think that if no one is buying anything, you should hop in and try to sell. Unfortunately, that won’t always translate to profit. You need to be aware of a time where people are spending and have the money, such as during the Christmas season.

    Like

  5. Michelle McNall December 6, 2015 / 5:50 am

    The marketing industry is ever-evolving- meaning the research never ends if a company is to be truly successful in their marketing efforts. Similar to this ongoing need for research, marketers will continuously need to do research on current market environments and consumer spending trends. As with anyone and anything, marketers must be able to effectively handle and seamlessly deal with change and adapt accordingly. This is one of the main factors, in my opinion, that predetermines whether a marketing strategy or team will be successful or not. Cool article, Andrew!

    Like

  6. Jane Paradise December 6, 2015 / 11:33 pm

    I thought that this was a very interesting topic, mainly because it is even more difficult for people to market a product in an economy / time period when spending overall is low and / or there is inflation as well. It is a true test to the marketer’s skills in my opinion if one can successfully market a product when spending overall is reduced. People always still need to purchase things when there is a recession going on, but these marketing strategies proposed in the article really attest to whether the brands / products will sink or swim.

    Like

  7. Kimberly Martin December 7, 2015 / 2:15 am

    I think environmental factors like a recession is very important for a marketer to understand. If they are marketing luxury products during a recession they probably will not find it very successful as consumers do not have the extra money to spend on such luxury items. They are probably better off waiting until the economy picks back up to start marketing. On the other hand marketers who have more everyday items will most likely find better success in their marketing especially if they are advertising a promotion or a sale during this time. In the last recession we went through, most contractors stopped building new houses because people were not buying and the prices were low so most would take a loss if they were to sell during that time period. I believe most consumers spending changes during a recession. I think they are more aware of how much they are spending and what they are spending it on because they have less disposable income. Some of the findings from this article were kind of odd like the increase in tobacco, but more people are stressed during a recession and use tobacco as a stress reliever so it does make sense in a way.

    Like

  8. Rebecca Armstrong December 10, 2015 / 5:58 pm

    This article and many of the points were very interesting. I think that with the marketing industry consistently changing and evolving we need to keep an eye on the economy especially when it fluctuates as much as it does. This could either make or break you if you do not pay attention to the changes going on. With the inflation rate or recession pricing is always changing and it is a good thing to keep an eye on especially when determining a competitive price.

    Like

  9. Alyssa Crowley December 10, 2015 / 6:40 pm

    Staying up to date with trends and economic changes is important in any company. If the economy were to enter a recession companies must be ready to change their marketing tactics and offer products and services that will still attract buyers. When there are shifts in the market companies should have set plans for any type of situation. Being prepared prior to the market change will help the company continue steady success. Those who do not better prepare for these types of situation are sure to see a large effect on their company.

    Like

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s