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Determinants of Demand

Customers and consumers

Although the two terms are often used interchangeably, we need to distinguish between the two. Consumers are the end-user of a product, customers are anyone who buys the product. Sometimes customers and consumers can be another business organisation, but for now we will focus on the individual consumer.

Demand and marketing

To devise an appropriate marketing strategy it is necessary to analyse the behaviour of consumers, and to do so we can use the behavioural sciences:

•		Economics
•		Sociology
•		Psychology
•		Demographic trends

Economics

Economists are concerned only with what they describe as effective demand. Demand is only effective when the desire to buy is combined with the ability. Income is a flow of money over a period of time. For real income to rise, money income must increase faster than prices.

Disposable income refers to income after compulsory deductions such as tax. A large part of this is committed to regular payments (rent, mortgage, energy, travel to work, basic necessities). The residual amount is known as discretionary income and is crucial to firms selling non-necessities.

We also have to consider other factors that will affect demand for a product, such as:

•		The price of substitutes — rival goods
•		The price of complements — goods which are jointly demanded, such as cars and petrol.
•		The availability of credit
•		The liquidity of the potential buyer
•		Expectations about the future.

Effective demand means demand backed by the ability to pay. Consequently, economists are centrally concerned with how the ability to pay is affected by economic forces. The economic determinants of demand are:

1		Price. As price goes up generally demand goes down.
2		Income. As real income increases consumer spending habits change. A large part of one's income is committed to regular payments, the remainder is called discretionary income. Obviously, as real income increases discretionary income increases. In this case, the general pattern is for consumers to switch from inferior (basic) to superior (luxury/differentiated) goods. “Inferior” here does not necessarily mean “bad”, but indicates a product which is perceived to have less quality and to be less distinctive, and therefore to command a lower price.
3		The state of the economy as a whole — for example, whether the economy is booming, or in recession. This affects average incomes so the impact on a business is not really distinct from the second point. In a recession real incomes fall and consumers tend to switch from superior to inferior goods; this is called “trading down”. The opposite process — “trading up” — occurs during (1) booms, (2) the general increase in living-standards; (3) improvements in income during the lifetime of a consumer or household; (4) existence of substitutes- that is, the more near alternatives there are to a product, the more likely consumers are to change from your product.
4		Substitutes. A substitute is an alternative to a product. For example, a substitute for tinned cat food is fresh raw meat. The one is not a perfect substitute for the other; however, one brand of tinned cat food can be almost identical in quality to another, and so constitute a perfect substitute. The more substitutes there are and the less difference there is between the substitutes, the more sensitive the demand for a product will be to changes in price. In other words, it is the presence of substitutes that determines whether the demand for a good will be elastic or inelastic.

Sociology

People in society occupy different strata — which is called stratification — and their consumer behaviour is distinctively characteristic of the strata they occupy. A reference group is a group used by an individual to act as a point of comparison for their own judgement values, behaviour and purchasing habits.

The reference group may be a religious group, a club, a peer group or even one`s family. The individual identifies certain norms of behaviour, the values of the group to which the individual wishes to belong. These norms will either be prescriptive (laying down rules about what members must do) or proscriptive (rules about what they must not do).

Not all humans follow a group with blind conformity. Some individuals are less keen to follow the pattern of any group. Group members will also vary in their commitment to the group. As a rule we can say that the level of conformity is related to:

•		The degree of dependence on the group
•		The benefits of conformity
•		The sanctions arising from non-conformity
•		Individual personality

Two other sociological terms that should be considered are culture and socialisation.

Culture can be identified as social characteristics, including behaviour, ideas and beliefs that are shared within a group. Socialisation is the process by which this culture is transmitted to group members. One function of the education system, for example, is to socialise individuals.

The predominant culture of a society can be dynamic and changing. In a traditional culture behaviour habits (including buying behaviour and consumption) are rooted in the past. Western culture can be better described as an achieving or affluent culture.

Psychology

Psychology is the science of behaviour and mental processes. Its relevance to marketing is that it provides insight into consumer motivation and the cognitive processes involved in decision making.

Maslow, a psychologist, developed a “hierarchy of needs” based on the proposition that human beings need to satisfy a number of needs arranged in an ascending order.

Self-actualisation

creativity

Self-esteem

Self respect

Affection

Social needs

Safety

Concern for the future

Physiological

Basic biological needs

The theory is that we purchase products in order to satisfy needs, but the hierarchy concept suggests that:

(1)		We do not seek to satisfy higher level needs until lower needs are satisfied.
(2)		Once a need is satisfied, we move on to the next level.

Maslow`s theory now has to be applied to marketing practice. In an affluent society there will evidently be a larger requirement for goods which satisfy the higher order needs, but little growth in the lower levels.

Psychology also provides an insight into the cognitive aspect of purchasing. An understanding of perception enables marketers to plan promotional strategy. Our perception of a product and the promotional message is a function of:

•		the quality of our senses
•		the environment
•		our attitude
•		our experience
•		our expectations

Advertisers should devise an advertising message so that it is perceived in the manner intended.

The success of an advertising campaign is also dependent upon people remembering the advertisement, its message and the product. Memory takes two forms: recall and recognition. An understanding of how we remember is useful in the planning stages.

Price as a proxy measure of value

The importance of psychology may be considered in relation to the question of how people decide what they are prepared to pay for a good? Most goods have normal demand curves; that is to say, the demand curve is downward sloping, meaning that if the price is lowered then demand increases. However, in some cases this is not so, and that is especially true when consumers use price as a measure of the value of a good. Then, if the price falls, they assume that the quality of the good has also fallen, so demand decreases instead of increases.

We may ask: under what circumstances do we use price as a proxy measure of value? An example, might be when someone buys something like a washing machine. People who do not really know about washing machines may buy a more expensive machine, because they think it must be better than the cheaper model. Another example of this is when people buy computers. They may buy the more expensive computer because they believe that the more expensive it is, the better it is. People also buy expensive goods because they are a sign of status — certain goods become exclusive because of their price, and are an indication of wealth.

From the marketing point-of-view, it is important that if you are considering using a reduction in price as a means of generating greater revenue, then you must ensure that the consumers are not using price as a proxy measure of value, for otherwise, this marketing strategy could backfire

Demographic Trends

Demography (the study of population trends) is of interest to the owners and managers of business organisations because the human population performs two essential functions in the economy. Firstly it provides the labour force for the firm, and secondly, it provides the market for goods and services. Changes in the size or nature of the population will have an impact on the supply of labour and/or demand from consumers.

The population of the UK and other developing countries is growing only very slowly. The increase in population through birth and immigration exceeds the loss of population through death and emigration by only a small margin.