Consumer Preferences 101: Why do we buy what we buy?
Every morning you wake up and are confronted with thousands of choices. You wake up and you need to decide what to eat, where to go or what to do? Let’s say, you are hosting a party at your house and you’ve decided to get pizza. Out of all the pizza places in town, you ‘choose’ to go with Domino’s Pizza. When you look at their menu, you notice that they do not just sell pizza. You can ‘choose’ between something as basic as a simple Margherita or something as elaborate as a non-veg extravaganza. You can customize it by asking for wheat thin crust or some extra pepperoni or some extra cheese or no pineapple. As absurd as it may seem, they actually offer over 6000 different combinations of pizzas. And that is just the pizza option at ONE store. Each day your choices are nearly endless. So, how exactly do we choose what to buy?
We need to consider our preferences. These preferences may be certain characteristics, that a consumer wants in a good or service that makes it preferable to him. For example, for the party you are hosting, you choose to get chicken pepperoni pizza but your friend prefers to get margherita. You choose these respective pizzas because you ‘prefer’ them over the other pizzas available. Whenever we make a choice among the available options, we always try to make ourselves better off.
Assumptions of Consumer Choice
While making these choices, we follow some rules. First, Rule of completeness. When you compare two consumption bundles, you either prefer one over the other or you are indifferent between the two.
Second, rule of reflexivity. Any consumption bundle is at least as good as itself.
Third, rule of transitivity. Your preferences need to be logically consistent. If you prefer a Pepperoni pizza over Margherita and prefer a Margherita to a Veg extravaganza. Logically, you should prefer a Pepperoni pizza over a Veg extravaganza
Fourth, rule of monotonicity. More is preferred to less. Two pizzas are always preferred to one.
Concept of Utility
Consumer Preferences are essentially influenced by a slew of factors like income of the consumer, his budget, the influence of social institutions like family and friends. A close analysis of consumer choices leads to the making of his/her preferences. The underlying microeconomic theory that determines a consumer’s preferences is the epochal concept of utility that was introduced by Alfred Marshall in his book ‘Principles of Economics’. Each good we decide to buy provides us with some value/satisfaction.
In economics, this ‘satisfaction’ is called Utility. Theories of microeconomics conveniently assume that individuals are ‘rational’ and hence seek to maximize the utility derived from the products and services they choose. Therefore, when you choose between a Pepperoni or Margherita pizza, you choose the one that gives you higher utility or more satisfaction.
Why studying Consumer Theory becomes important?
In every aspect of decision making in our lives, economics is omnipresent. Due to the changing fashion, technology, trends, living style, disposable income, and similar other factors, consumer behavior also changes. A marketer has to understand the factors that are changing so that the marketing efforts can be aligned accordingly.
Tracking consumer behavior through various means like artificial intelligence, machine learning and an all-pervading internet allows firms to have a clear understanding of consumer preferences and this leads to the making of a consumer-oriented market.