Business Theories of Buying Behavior

"Buying behavior" refers to all the decisions people and businesses make when they buy products or services. Several different theories have been proposed to explain and predict the buying behavior of both companies and individuals so that business owners can make the best strategic decisions and address customer wants and needs.

According to classical economic theory, people make their buying decisions based on a rational analysis of their own self-interest in the situation. The buying behavior of an individual can be predicted by analyzing what course of action would most benefit that individual. In theory, the same principle applies to the buying decisions of groups of individuals such as businesses. However, the idea that people are rational actors in the first place has been questioned by more recent economic theories.

According to an economic theory called new institutional economics, the rationality of any buying decision is limited by different forms of uncertainty. For instance, a person buying a ticket to an outdoor baseball game cannot know whether it will rain or not, so he cannot know whether he will receive any benefit from his purchase. The decision to buy or not to buy cannot be strictly rational under these circumstances. In many buying decisions, the potential buyer doesn't have access to as much information as the seller. For example, if a company is considering investing some money in a development project, the developer might not share the fact that he has been having problems getting the necessary permits. The company has to decide whether or not to trust the developer, which cannot be a purely rational decision.

Process theory is another economic theory that seeks to explain the difference between what people would theoretically do if they were rational economic actors and what they actually do in practice. According to process theory, some buying decisions are made from a self-defensive perspective and others from an opportunistic perspective, depending on the buyer's perception of possible gains and losses. For instance, a good bulk price on a particular item can convince a consumer to opportunistically buy more than he normally would and sometimes more than he can possibly use. On the other hand, a business owner might pass up a favorable investment simply because he doesn't trust the people trying to sell it to him.

Consumer buying behavior can have a disproportionate effect on the buying behavior of businesses. For instance, if consumer demand for a particular product drops by 10 percent, the company that makes the product may switch to a less-expensive supplier for one of the component parts to make up the loss. The original supplier suffers a 100 percent loss of orders from that company because of a 10 percent drop in consumer purchases. This is known as the bullwhip effect, because a small change at one end has dramatic effects on the other end. Some businesses that don't sell any products directly to the public still advertise to consumers in an attempt to influence this bullwhip effect.