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.
Considerations
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.
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