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Consumer Buying Power

13 May, 2016 - 13:23

A consumer's buying power represents his/her ability to make purchases. The economy affects buying power. For example, if prices decline, consumers have greater buying power. If the value of the dollar increases relative to foreign currency, consumers have greater buying power. When inflation occurs, consumers have less buying power. A list of several aspects of consumer buying power is presented next. Each can be measured relative to a marketer's external environment.

  • Buying power: A consumer's ability to make purchases.
  • Income: The amount of money an individual receives from wages, rents, investments, pensions, and/or subsidies.
  • Disposable income: The income available for spending after taxes have been paid.
  • Discretionary income: Disposable income available for spending or saving after basic necessities (e.g. food, housing, clothing) have been purchased.
  • Credit: An individual's ability to buy something now and pay for it later.
  • Wealth: The accumulation of past income and other assets including savings accounts, jewelry, investments, real estate, and the like.
  • Willingness to spend: An individual's choice of how much disposable income to spend and what to spend it on.
  • Consumer spending patterns: Amount of money spent on certain kinds of products and services each year.
  • Comprehensive spending patterns: The amount of income individuals allocate to expenditures for classes of products and services.
  • Product spending patterns: The amount of income spent for specific products in a product class.

Several of these concepts are illustrated in the Newsline that follows.

Newsline: Everyone seems to have money

It's been called mystery prosperity. The nation's economy is growing at a rate not seen since the 1960s, unemployment and inflation are the lowest in decades, and the stock market is setting records with regularity. Some economists explain our good fortune by claiming a new economy is at work, one driven by deficit reduction, low interest rates, and technological advances. Others point to things like the Asian contagion and the inevitable limits of the bull market, and wonder how long this can last (in fact it ended in 2000).
But despite market jitters, at least we can take comfort in knowing that the economy may be more stable than many fear, if only because consumer spending—which accounts for two-thirds of the nation's economic output—has been considerably muted in the past decade. Talk about unconventional wisdom. How can this be? Hasn't the media been trumpeting America's runaway spending spree?
It's true that consumer spending has been growing, but only at the aggregate level: the population is growing, the number of households is increasing, and the baby-boom generation—the youngest of which is now 35—has entered its peak spending years. But a close look at trends in spending by individual households tells a different story. Despite low unemployment levels and rising wages, the average American household's spending has been cautious, if not downright miserly, in the last decade. The average household spent 13 per cent less on food away from home in 1997 than 1987, after adjusting for inflation. It spent 25 per cent less on major appliances; 24 per cent less on alcoholic beverages; 18 per cent less on newspapers, books, and magazines; and 15 per cent less on clothing.
The most important predictor of spending is lifecycle stage. Typically, households headed by twenty-somethings spend less than average on most products and services because their households are small and their incomes are low. Spending hits a maximum in middle age as family size increases and incomes peak, then falls again in older age as household size and income decline.
These stages, combined with the baby booms and busts of past decades, have made consumer marketing a complex endeavor. Add a fundamental change in the lifecycle pattern of spending, and marketers are discovering that doing business today is a lot like building a house in an earthquake zone. 1