What’s it: Consumer spending patterns are changes over time in the total money individuals spend on goods and services for personal use. It also refers to the relative proportion of what an individual consumes. Comparisons may be based on time or others, such as location, geographic area, age, and income. For example, urban people spend more money on meat than rural people.
Consumer spending may not vary in the short term, for example, daily. However, when we observe it for a long time, it can change quite dramatically. Several reasons explain that. For example, consumers might respond to changes in prices, incomes, or tastes to change their spending. However, because these factors are unchanged daily, their spending patterns will follow.
For example, spending on services often increases as people’s incomes increase and prosperity in the economy. When their income is low, spending on food usually takes the dominant portion. However, spending on items such as travel or education increases as their income increases.
Why are consumer spending patterns important?
Identifying and meeting consumer needs is the key to a company’s success. Most large companies come from an entrepreneur’s idea to find a solution for consumers. Their solutions are manifested in the products they offer. For example, their product may not have been on the market before. Or, their product evolutes the existing one. And they try to offer better by considering aspects such as price and quality.
Then, observing consumer spending patterns becomes important for several reasons. First, consumer needs are not static. However, they change over time, perhaps due to changes in income or tastes. Thus, what companies offer today may not be relevant in the future in meeting consumer needs.
Second, research on consumer spending patterns becomes input in developing strategies. Companies need the insight to understand consumers in their target market and develop effective strategies. Thus, their strategy is more relevant to the target market.
The research doesn’t just reveal what consumers want the most. But, it can also reveal information such as how much income consumers spend on purchases. Thanks to this information, the company can estimate the market size and its growth prospects in the future.
Third, understanding consumer spending patterns enables companies to remain adaptive to market needs. Customers are the king. And as their needs change, companies must adapt.
The company researches and explores these changes and responds to them with more relevant strategies to succeed. On the contrary, their failure to respond to changes in consumer needs leads to business failure.
Fourth, observing consumer spending trends allows companies to better understand the decisions behind why consumers buy certain products and not others. In addition, they can identify what influences consumer spending decisions. Thus, they can understand consumer shopping decision-making and adjust their marketing strategy.
Why are consumer spending patterns changing?
Consumer spending continues to change from time to time. Some may change quickly, such as spending on fashion. Meanwhile, others may change slowly, such as spending on food. Several factors contributed to the change, including:
- Tastes and preferences
- Interest rate
Consumer tastes and preferences
When tastes change, consumer spending patterns also change. They will spend money on what they love and leave everything else behind.
In some businesses, this factor is quite dominant. Restaurants are an example. Restaurants need to keep up with changes in consumer tastes to continue to be in demand. For example, nowadays, consumers are more aware of health. As a result, they change their preferences for food and prefer healthy food menus.
Tastes also vary between consumers in different regions. For example, McDonald’s caters to local tastes instead of offering a standardized menu worldwide. This strategy enables the company to be successful in its business.
But, in other cases, fast food companies may offer menus from other countries to their local operations, allowing local tastes to adapt. In addition, factors such as information technology develop consumer interest in trying menus from other countries.
The fashion business is another example. In this industry, consumer tastes and preferences are also changing quite rapidly. For example, what to wear in the fall is not the same as what to wear in the spring. And consumers also often follow other people’s styles, such as celebrities, to choose clothes. For these reasons, fashion businesses frequently change inventory to keep up with what their customers want.
Rational consumers adjust their spending to their income. For example, low-income households spend more on core or primary needs such as food, clothing, utilities, and rent. In contrast, wealthy households spend more on tertiary needs such as vacations, branded clothing, and luxury goods.
As low-income households move up to a higher class, their consumption patterns change. Their income increases, prompting them to spend money on less essential needs such as vacations. However, with a higher income, they can still fulfill their core needs while satisfying their wants (vacation).
Economic factors usually play a role in influencing household income and, therefore, their spending patterns. For example, consumers spend money on expensive goods such as cars when their income increases, for example, during a prosperous economy. But, on the other hand, during a recession, they reduce spending on more expensive products or even stop them altogether.
What an older person needs is different from a younger one. And in general, life stages such as getting a first job, marriage, having children, and retirement greatly impact consumer spending patterns.
For example, older people will spend more money on financial security and health care. On the other hand, young people spend more money to fulfill their daily style needs. Specifically, the under 35 groups allocated more for transportation, education, clothing and services, food away from home, and shelter. Meanwhile, the 65 and older group spent more on health care and cash contributions to charities and other social organizations.
New technologies are evolving consumer needs and making old goods no longer relevant to needs. For example, computers replaced typewriters. Likewise, smartphones are replacing wired phones.
As a result of such changes, consumer spending also changes. For example, they no longer buy typewriters but computers. And technological changes are also pushing people to switch from personal computers to laptops.
Price changes affect what consumers spend. They tend to reduce the demand for a product when its price rises. On the other hand, demand will increase when their prices fall.
And in aggregate, these price changes are represented by the inflation rate. During high inflation rates, consumers tend to shop now for their daily products before prices increase in the future. Conversely, when inflation falls (or deflation), consumers postpone their spending now, waiting for prices to fall in the future to get cheaper ones.
Consumers often rely on loans to shop for items such as cars and other durable items. However, because they are expensive, income is not enough to buy in cash. So instead, they buy on credit.
Thus, high-interest rates will decrease consumer spending on such items. But conversely, when interest rates are low, they can buy these items financed with cheaper loans.
What to read next
- Consumption Expenditure: Type, Determinants, Impact
- Consumer Spending Patterns: Influencing Factors
- Which Factors Affect Consumption Expenditure?
- How Consumption Expenditure Affects the Economy