Factors Affecting the Decision-Making of a Consumer - Coursework Example

Name of the Student Name of the Institution Course Date Factors affecting the decision making of a consumer Introduction The purpose of this study is to determine the external factors that influence the consumer when making purchase decisions in the market. In this case, the main scope of the paper is to come up with reliable information based on the available consumer theories to analysis the circumstances that makes one consumer to decide on buying a product or not. In addition, the study will discuss the consumer theories and facts that can be used to explain some of the reasons why consumers tend to behave in specific ways especially when making decisions on spending on goods and services. The information got may be used later for different purposes, especially for those related to research in the same field. Most importantly, the study shall come up with a reliable conclusion in relation to the factors that affects the consumer spending decisions and habits, an information that can add to the body of knowledge that already exists in the field of economics. Background information From the economic point of view, a consumer is a person, a group of people or an organization that become the final user of a good or a service produced in system, particularly a social one. The aim of every consumer is to derive the maximum satisfaction and/or utility from the goods or service and therefore is very keen when making purchases on such products. It is important to note that in every market, the societal beliefs and practices are very important in shaping up the quality, marketability and other characteristics of a product in the market. Therefore, every product in the market is produced by the producers who are well aware of the consumer tastes and preferences in the product market. The main focus is the choices that the consumer make based on his or her preference of the good or service. In this case, the consumer is perceived to be very rational and makes an informed decision based on the value he or she associates with the product. Consumer theory Consumer behavior is the study of how consumer purchases of products and services are influenced by one factor or another. It includes the analysis of the cognitive interactions and other environmental factors that consumers encounters in the process of exchange of gods and services. In addition to that, the behaviors form the basis of making a decision by the consumer in purchase, usage or disposal of the commodity or the product (Green, 1976 p 24-36). Consumer theory tries to interlink the rationality of the consumer in making the rational consumption decisions. It considers the preferences, satisfactions, and the constraints that may determine the consumer’s spending pattern. In the process of discussing the factors that influence the decision making process of the consumer in the market, it is important to analyze the consumer theory in order to exclusively address the consumer problem in the market. After depicting the consumer as rational, it is important to note that any decision that will be made by the consumer will be driven by the aim of achieving the maximum satisfaction out of the product (Hall, 1990 p 37-71). According to the utility theory, the amount of satisfaction the consumer gets from consuming a product is a subject to the some constraints and indifference. In an economic situation, the consumer’s range of choice for a product is controlled by income and the determination of achieving some satisfaction. In this case, the market avails a number of different products from which to choose from based on his or her income, opinion among other factors which will be discussed below. Therefore, the problem of the consumer is maximizing his or her utility but in the presence of some constraints, especially income or wealth (Hoyer and McInnis, 2001). Making some assumptions of in the market such as the presence of perfect information in the market, consumer takes prices as they are, the prices are linear and goods are divisible, the following graph is a representation of the budget of the consumer in this case. Assume also that the consumer is involved in a situation of choosing between two products, X1 and X2. The two products are of different prices, i.e. P1 and P2 X1 k (P1, y) K(p2,Y) X2 The consumer will choose a bundle of X1 and X2 that will maximize his or her utility subject to the income constraints Y. The consumer will actually be in a situation to make a choice out of product X1 and X2 according to his or her preference to consume, based on the income (Robertson, 1970). The curve shows the consumer demand which indicates the relationship between the consumer’s consumptions and the expenditure. The purpose of the consumer theory therefore is to analyze how the consumer comes to an equilibrium linking preference and expenditure through ensuring a total maximization of satisfaction when subjected to some financial constraints. There is an optimal choice that the consumer will make finally. This optimal choice of consumption takes place at the point of tangency between the budget line and the preference curve, also kwon as the indifference curve. This can be illustrated in the diagram below: X1 P (The optimal choice of X1 and X2) X2 At point p, the consumer makes the optimal choice based on the available products in the market, the budget constraints and the maximization of utility. The prices of the two products, P1 and P2 can be compared in this case, a process of the marginal rate of substitution i.e. substituting product with higher prices with those of relatively lower prices. P 1/ P2 = MRS The marginal rate of substitution led to consumer’s optimal condition which acts as a guide for the decision made by the consumer in the market. Preference is the need attributed to consumption of a product or service by an individual consumer which in the end makes the consumer to choose one product over the other based on the income in a specific period of time. Choice is a decision made by the customer to take one product in favor of the other one in the market. Taste is the value that the consumer link with the product based on previous consumption or information he or she has on the product. Taste and preference are therefore the ingredients to targeting marketing of the products and services, especially after knowing the tastes and preferences of customers. Product improvements in terms of tailor-making the products to suit the customers’ tastes and preferences can be the best option for a seller or producer who wants to maximize their sales (Green, 1976). In a normal market situation, the consumption of goods and services always fall as their prices increases. This is because generally consumers are very keen on price of an item because the income constraints will restrict the range of goods and services to purchase. In this case, the consumer will opt to take another product with the same quality but of different lower price, a situation known as substitution effect. On the other hand, consumers with higher income will demand products with relatively higher prices, i.e. as income increases, demand for these products increase. This is known as the income effect. Therefore the consumer can come with a bundle of the two products so as to maximize his or her satisfaction. In this case, the budget line, bundle to consume, quality and the marketing strategies in the product market all will be the subject of shaping the consumer purchase decision in the market. To effectively analyze the budget constraints and consumer’s choice, the graph below will aid in showing how the consumer’s choice may be limited in the market based on the problem. X1 X1* d c a Y b X2* X2 In the market, the consumer has the choice to make between either consuming good x1 or good x2. In this case, the consumer can consume along the budget line indicated on the graph as Y. a consumption bundle of the two products can be achieved at the point where the indifference curve just cuts the budget line. At this point, the consumer can however attain a maximum satisfaction between the two products but within the budget line (Green, 1976). The indifferent curves a, b, c and d shows the aspects of consumer’s choice for increasing utility. In this case, the consumer will come to an exchange between prices and income which will automatically influence the consumer’s decision making process. The two effects, substitution and income effects are therefore very important economic tools to analyze the consumer behavior in the field of making choice. More importantly, the basic understanding of the consumer behavior starts from the ability to compare quality, prices and other characteristics indicated above. It all depends on the type of the product in the market. Certain goods are demanded when their prices are high because they are associated to high class. These are cases of abnormal demand. However, a normal demand respects the law of demand and consumers are very rational when making the purchase decision due to limiting financial resources and the desire to maximize utility. Holding other factors constant, the purpose of the rationality concept is to guide the consumer all through the purchase process, without making regrettable sacrifice in the market. Marketers therefore analyze the natural and economic characteristic of the consumer to design their products, through value additions, packaging, prices reductions, market awareness and other marketing strategies to ensure customer have a large range of tastes and preference that would eventually shape their purchase decisions (Green, 1976). Factors that influence the consumer’s decision making The consumer aims at maximizing his or her satisfaction from the product based on what they know, think, see or have been told. Most decisions arise from what they believe about the product, a fact which makes them become brand loyal to some products over the others. These are majorly the internal factors which make a consumer to behave in certain ways (Hall, 1990 p 37-71). However, the study is focused on the external factors that may make the consumer to behave in the same way too. To come up with an effective way of addressing the topic of study, the paper summarizes the factors affecting the consumer’s decision making when purchasing a product in the following factor outlines: Family The family is most considered as the best reference group for any person. In this case, it becomes the ultimate consumption unit in terms of consumer goods and services. An immediate family, which is considered as a group of two or more people living under one roof and are related through birth, adoption or marriage, have a strong influence on how a consumer makes the decision when making some purchases. The buying behavior roots from what the parent’s behavior and transferred to the consumer during growth and when it comes buying as well. What an individual observes from the parent’s characteristic or style behavior become more of a culture to that individual, especially from his or her childhood thereby becoming a habit. The major economic characteristic of a family is that it dictates the economic interpersonal well being of an individual skills and behavior in terms of spending. This is supported through provisions of emotional and religious values, which conversely will determine the moral standard of the same person. These are very important values when it comes to spending because they determine what the customer is likely to buy and not to buy i.e. the consumer preference and choice of the product. Moreover, the family may determine the ethical lifestyle values and certain social relationships. Market is a social stage of exchanging goods and services between the buyer and the seller, and therefore social relationships and values of the consumer directly affects their decision making in the market. It is also very important to note that the family life cycle stage (stage of the family include the newly married, couples, singles, old married etc) also determines the final decision of the consumer’s spending behavior. In this case, the purchasing behavior of the newly married people tends to be biased because it encompasses making accommodative purchase for the two. This cannot be the same to the buying behavior of a person whose marriage has lasted for long or to a person who is single as well. This means that marital status can also dictate what one buys in the market. The most crucial part to the company or producers of the product is the members of the family who influences purchases of some products. For instance, certain products are generally purchased due to the influences of children in the household. In this case, many companies may tailor make products with specific target in households. Many products target children because they force compulsory purchase on their parents or guidance. Reference group behavior Reference group is the group that a consumer wants to be identified with or is already a member. The social status of a person makes him or her to be in a group. This is because man is a social animal like other animals too. The group characterizes what the person wish to accomplish in life, beliefs, values and set of norms which are all for the persons mutual goals. It is important to note that consumer behaviors mostly are controlled by the group setting (Solomon, 1995). A consumer wants to buy what can be approved by the group that she or he is identified with. Reference group can affect the behavior of a consumer through the following means: i. First through the attitude of the group, that in this case encompasses pride, status, standards among others, which directly affect the psychological behavior of the consumer ii. Nature of the group in terms of the frequency of interactions and the cohesiveness. This may include the instances of the family, classmates, playmates etc with whom the consumer interacts with more frequently. iii. Nature of the product in terms of how unique it is and its visibility maybe the yardstick of identification of the reference group thereby influencing how the consumer make decisions when it comes to purchase of the product. The reference group also becomes the basis of comparison of an individual in terms of values, style and preferences. During the processes of deciding what to buy, these attributes become manifested in an individual’s choice of the product, which tend to reflect that of the group (Robertson, 1970). Culture Culture dictates the way people live and by a large extent affect the purchasing patterns of individuals. It represents the shared beliefs, customs, behaviors and attitudes which are more common in a specific society. These attributes stipulate how people live and how they purchase as well. In this case, culture is considered the widest environmental factors that have great effects of an individual’s behavior. Through learning, sharing, satisfactions of needs, similarities and differences, culture offers variety of distinct societal behavior that a consumer cannot avoid but habitually live by. Therefore, decisions made during buying process of a consumer may be largely dependent on the cultural background of the consumer (Taylor and Lee, 2007). Over the years, the cultural changes have changed the consumer behavior as every year, decade, and century, advancements are made in the people’s way living. Every era has its fashion of products and it is improved marginally every succeeding years. This has been enabled through technological advancements, increase in wealth, changes in lifestyles, ownerships and the youth market. Technology in particular has led to development of many items in different markets at different capacities of consumption. It has made it easy to tailor make products that suit individuals of different cultures thereby increasing varieties for choice (Taylor and Lee, 2007). Although there have been cultural changes over the years, the sub cultures still dominates an individuals choices of the products to purchase and hence become a big external factor that effects the consumer‘s choice in a market set up. Income and Social class Just as educational status, economic status in terms of income as well as wealth has big influence on an individual’s behavior, so does the social status determine the individual’s mentality. All these statuses respond to specific social class, which have the same characteristics in terms of education, income and the social standards. It is important to note that a consumer belongs to a specific social class, which in the end will affect the decision that she or he will make in the process of making purchase decision of the product (Green, 1976). More importantly, the basic understanding of the consumer behavior starts from comparison of what one’s social class would buy in the same circumstance. Economically, people with high income will tend to associate themselves with high-prized products irrespective of how good the product maybe. They associate quality with price which in most cases is not true. On the other hand, those individuals with middle and low income goes for either quality or compares the price of the product with an alternative, through the processes of decision making. Educational status gives an individual a social class i.e. the individual tends to associated with the members of his or her status. This status may in a large extent determine the outcome of what the individual in this class may purchase. In this case, the decision to purchase the product will be based on whether it would suit that status. Opinion leadership The role models in the society or in an individual’s life may contribute the choices that one makes in life. These choices may become very clear especially when making purchase on a product. In the product market, a consumer may come with a pre-formed opinion of the product based on opinion or reaction of the person or the role model. Opinion leadership is the process whereby one person, also known as the opinion leader, automatically influences the choices, actions or opinions and attitudes of other people, who are in this case known as the opinion seekers (Green, 1976). The market situation provides both the opinion leaders and the opinion seekers, whereby the opinion leaders are those who are believed to have used the product. They are also those who are believed to have the perfect knowledge about the product. Moreover, their judgments are taken seriously and may affect the decision made by the consumer during buying process. The market situation also provides the buyers who value the opinion of other people especially the opinion leaders in order to make the final decision whether to buy the product or not. It is important to note that information is very vital in a market because the consumers will always seek information about the products they want to buy and this information will determine their final decision as far as the purchase of the product is concerned. If the opinion leader gives a wrong and/or low information or opinion of the product, automatically the consumer’s decision will be affected negatively. On the other hand, if the opinion of the opinion leader embraces the product, the consumer’s decision will be affected in a positive way. Therefore the opinion leader of a product determines to some extent the decision that a consumer makes when buying a product. Religion Just like culture, religion represent the shared beliefs, customs, behaviors, practices and attitudes which a more common to a specific religious community. Religion is belief that grows within an individual based on the practices and teaching of the religion, and is introduced to by the parents or friends. The religious background of an individual therefore may affect what the consumer purchases and what not to purchase. More importantly, certain products are not consumed by some religious groups thereby affecting the attitude of the consumer towards that product (Hoyer and McInnis, 2001). In the market, the variety of the product gives the consumer the advantage to make a choice out of the available products. Despite the fact that religion can be one of the factors that may influence the buyer’s decision to purchase the product, it is within the producer’s power to make the product in such a way that they suit the requirement of almost all the religious groups. In this case, the producer or the seller aims at maximizing sales through ensuring that his or her customers get the products that much their standards, at the same time, the consumer’s aim is to choose a product that will enhance his or her satisfaction. Therefore, the decision to buy the product is very vital to both. Marketing activities The aim of every marketing strategy is to capture as much as possible the attention of the customer. Since the drive to buy is motivated from the inner feeling of the consumer through a mental judgment of the product, it is important for producers of a product to have the customer judgment of the product in mind. Marketing activities involves creating awareness of the product, increasing the appeal of the product to suit the customer’s expectations, performing research and development on the product and provisions of discounts among other activities aimed at convincing the customer to buy a product. Extensive marketing activities may influence the decision making process of the consumer. This is because they increase the appeal of the product, thereby increasing the chances of the consumer to purchase the product. It is therefore that the seller in the market increases the marketing activities if the aim of the seller is to maximize sales and increase the profit margins. This includes expanding the product mix so as to improve the suitability of the concerned product in the market. The factors above coincides with the consumer theories discussed above to actually determine the optimal choice that a consumer faced with ambiguity of making choice in the market would make. The most important principle for marketers is to realize the principle of consumer rationality which gives the consumer the power to choose between one or more goods and services from the variety available in the market. Conclusion A number of models have been designed to determine the ultimate choice of the consumer in the market aspect which involves making decision. Likewise, many reasons and factors have been pointed out to determine what influences the consumer behavior in the same market situation. This has therefore been an area of prompt discussion and research. However, the fundamental understanding of the consumer’s rationality through the ability to make critical decisions gives the consumer the power to come up with his or her optimal choice. Decision making is always accompanied with complexities and they make the consumer to behave in a particular way which is common amongst all the consumers. The marketers, producers or sellers must be familiar with these behaviors in order to determine how perfect to maximize their sales and profit. At the same time, consumers are often faced with some constraints, which can be income, pride, among others, but at the end, the choice of the product that he or she will make, will go along way satisfying his or her utility. Consumer theory helps economist to relate consumer behavior based on the available market variables to he final decisions made by the consumers to consume a product through making purchases. This makes the theory an important tool for the marketers, companies and economists in analyzing the consumer behavior, which will eventually shape the market. References: Deaton, A., & Muellbauer, J. (1980). Economics and consumer behavior. Cambridge: Cambridge University Press. Engel, J. F., Kollat, D. T., & Blackwell, R. D. (1968). Consumer behavior. New York: Holt, Rinehart, and Winston. Green, H. A. (1976). 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