The purchasing decisions of consumers vary depending on a variety of factors: income, taste and preferences and personalized needs are just a few. Despite the attempts of the best economists, pinpointing why consumers spend is difficult. However, consumers generally fall into specific categories. This categorization makes assessing their spending habits easier for marketers and economists alike.
Discretionary Spending Consumers
Groups with high amounts of discretionary spending have distinct purchasing habits. Teenagers are a primary demographic: a 2008 Boston Globe article outlines that even with the recession, teens account for $27 billion annually in clothing sales alone. Because teens have few or no bills to pay, this money is spent on non-essential goods like games, activities and snacks. Certain industries, like retail and electronics, receive a large chunk of their business from this demographic. As such, significant marketing dollars are spent enticing this consumer group to spend money on their product over others. However, the purchasing power of this group rises and falls based on the income of the parents.
Luxury Goods Consumer
Luxury goods are items consumers purchase when base needs, like food and shelter, are met. Luxury goods include name-brand watches, fancy cars and plasma televisions. A consumer who purchases these goods pays more attention to the brand name than the price: for example, she will opt for the $4 latte at a popular retail outlet instead of brewing her coffee at home. Companies that sell luxury goods market concepts of quality and emotional appeal, as opposed to a price. The higher the income of the consumer, the more luxury goods they tend to purchase. Hence, income (above a baseline amount) and luxury good consumption are directly proportionate.
Inferior Goods Consumer
Consumers with a low income purchase primarily inferior goods. Inferior goods are chosen over more expensive alternatives. For instance, inferior goods for one consumer are standard eggs instead of free-range eggs, or store-brand cereal instead of name-brand cereal. This consumer group uses price as the primary guide for purchasing decisions. The Economist explains that a decrease in personal income means an increase in the consumption of inferior goods, whereas an increase means consumers buy fewer inferior goods and more normal goods instead.
Businesses and Corporations
Businesses are another type of consumer. Companies are in a unique position to buy goods due to their purchasing power: they can buy wholesale and negotiate the price with suppliers, whereas a consumer cannot. Industrial-grade consumers are often price-setters. An example is health insurance companies: These groups negotiate the price of services, like operations, and command lower costs by virtue of their large customer base. Individuals who have to purchase health insurance on their own are “price takers” because they must accept market value.
Since 2008 Catherine Capozzi has been writing business, finance and economics-related articles from her home in the sunny state of Arizona. She is pursuing a Bachelor of Science in economics from the W.P. Carey School of Business at Arizona State University, which has given her a love of spreadsheets and corporate life.