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.