Marketing metrics such as share-of-market and share-of-wallet attempt to gauge the success of a firm on serving the demand that exists in a given marketplace – but they are often based on specious assumptions about consumption, and as such are often grossly underestimated or overestimated due to an erroneous supposition about how much of a given product the market can reasonably be expected to demand. This leads to serious flaws in strategic planning, and as such merits some consideration.
Basis of Demand
It is act of consumption that defines an individual as a consumer, and the aggregated consumption of all consumers that constitutes demand in a marketplace. While seemingly obvious, it is very often overlooked by those who propose models that consider supply to be the basis of demand. This is the primary flaw in accepting the current level of consumption as an indication of market demand, as consumers can only consume as much as suppliers provide, and are only willing to consume a certain amount at the prices demanded by suppliers.
A secondary flaw, less fatal but still quite debilitating, is that accepting the current level of consumption as market demand assumes that consumption is fixed and inflexible, which leads to competitive strategies (struggling for a greater share of fixed demand) and virtually eliminates innovative strategies (finding ways to increase the amount of demand). A sustainable business can be built upon this faulty premise, but its potential for growth (and eventually survival) is significantly diminished.
Physiological Range of Consumption
The primary source of demand for goods and services deemed to be necessities is the health and welfare of the consumer. It can be shown that under- or overconsumption of any product has negative consequences to the consumer. Deprivation of a survival good such as water leads to thirst, dehydration, and eventually death – but at the same time overconsumption has been shown to have detrimental and deadly effects. There is only a certain range in which consumption has necessary and positive effects.
However, two factors prevent the physiological range of consumption from being a broad and reliable basis for determining market demand. First, the vast majority of goods in the present-day market are luxury items rather than physical necessities, so their consumption is not necessary for the sustenance of life, and whose overconsumption does not pose a physiological threat. Second, this assumes just-in-time acquisition, whereas the majority of goods are accumulated for future use – hence while damage may be done if the goods are consumed immediately, there is no harm done in acquiring them for use at a future time.
Psychological Range of Consumption
Taking those factors into account, consumption of most goods (in terms of their purchase, whether the actual consumption is immediate or delayed) is subject to largely psychological factors. Specifically, the determinant of the behavior of consuming and accumulating goods is driven by an individual’s perception of his security needs, the second level of Maslow’s hierarchy. At this level, an individual’s immediate survival requirements are met, but he still feels an urge to accumulate goods for future consumption. This can be extended to include all products (services as well as goods) by the use of money, whose accumulation is functionally infinite.
This begs the question: how much does a person need to accumulate in order to feel adequately secure? But because perception of need is individual, there can be no universal answer. The topic becomes politicized when individuals presume to judge for others and seek to deliver benefits to the “poor” who do not have enough or forcibly take from the “rich” who have too much, or to defend themselves when they disagree with the estimation of others whom they perceive to be a threat to their own security. But this is imposing one’s own will upon others, often by force, and does not reflect the natural behavior of consumers.
There can still be made a plausible case for the extremes. A person can be said to have “not enough” when they suffer adverse effects as a result of exhausting their inventory and doing without some necessary good. A person can be said to have too much when their inventory goes to waste before it is used or when the amount they have accumulated exceeds the lifetime consumption of their household.
But psychologically, it’s all about the way a person feels, which is highly subjective: the amount that gives one person a sense of security and comfort may seem insufficient to a second person and superfluous to a third. It may be based upon a rational estimation of survival needs, consumption and replenishment rates, but it is in fact an entirely emotional matter that is often more rationalized than rational.
There is a neurological basis, derived from studies into the phenomenon of hoarding in which subjects were asked to sort through a variety of items to decide what should be kept or thrown away. The experiment correlated the level of hesitation a subject showed in deciding to throw something away to activity in the anterior cingulate cortex – an area of the brain associated to emotional discomfort. Curiously, it is the same region of the brain that shows activity when religious individuals are asked to seriously contemplate that god may not exist, which further underscores the poignancy of the comfort people achieve by accumulating products. However, the assessment of what level cortex activity is dysfunctional is based upon a largely arbitrary assessment of what level of attachment is functional.
Thus considered, it does not seem reasonable to attempt to draw a firm conclusion for determining market demand, even if the consideration is limited to current practices, but there are clearly a few factors to be taken into account:
- Whether the product in question is a necessity or convenience
- The durability of the product (for physical accumulation)
- The degree of attachment customers feel to its possession
- The economic trade-offs of accumulating one good rather than others
In all, it remains a far more complex matter than merely considering current levels of consumption or unfounded speculation about the “right” or “normal” level of consumption.