How Income Affects Consumer Preference

In the previous chapter, we discussed demand and supply and how these factors influence the price of a product. This brings us to consumer preferences and income, the driving force behind how and why consumers judge products.

Consumers' likes and dislikes are the assessments and judgments of the products and services based on their quality, price, convenience, and personal tastes. Such preferences determine a buying choice and affect it in various ways, like social influence, advertising, and changes in income or technology.

How we choose and why we buy has a ripple effect that makes its way into the dynamics of the stock market. It is a chaotic dance between consumers and corporations; the stock is the stage where the actions occur. In simple words, changes in tax rates and regulations play a significant role in consumer purchasing behaviour, which ultimately influences the movement of corporations and the stock market as they react to demand fluctuations.

 What is Consumer Preference?

Consumer preference is used to define the choices that a customer makes when purchasing any goods or services. As an action, consumer preference is a key part of the whole economic process as it defines the kinds of goods or services a consumer ascribes to, the behaviour that enables them to arrive at the choices they make, and the overall income levels of the population. 

The Impact of Income on Consumer Preferences

The income effect refers to the changing needs of a consumer that are influenced directly by a concurrent change in their salary levels. The demand and price for a service or a good would, therefore, be directly affected by the purchasing power of the consumer. 

It is important in this regard to remember that the income effect is influenced primarily by a change in your real income. This means that the purchasing power is solely influenced by a change in your own income and not through external factors or policies that increase your purchasing power.

For example, if you were earning a salary of ₹30,000 and your income increased by ₹10,000, you might decide to divert a part of that additional income into shopping or eating out. You might even consider buying a brand that you otherwise wouldn’t have. This is how income influences consumer demand.

The impact of pay hikes on demand for products and services can be evaluated via the perspective of the wage-price spiral and wage push inflation.

Wage Price Spiral:

This macroeconomic theory describes the cause-and-effect link between growing wages and rising prices, or inflation. When wages increase, the disposable income that the worker has in hand grows. This increases a customer’s purchasing power to buy more products, in turn triggering the prices of the goods to increase due to increased demand. Now, the rising prices of the goods would again trigger the need for a further wage increase, leading to higher production costs, which finally leads to an increase in the price of goods again. Thus creating a spiral.

Wage Push Inflation:

This is a type of general inflation as a result of higher levels of wages. Employers raise the prices they charge to pay larger salaries, and large increases in earnings also contribute to the rising cost of living for workers. Companies may increase the amount of pay for various reasons, including an upsurge in minimum wages or the acquisition of talent. Wage push inflation results due to an increase in wages. With each pay raise, the price of goods and services will also increase.

The wage-price spiral highlights a wider notion of interrelated pay and price rises driving inflation, whereas wage push inflation explicitly stresses how growing wages contribute to total price hikes in an economy.

Income-Level Variations in Consumer Preferences

Consumer preferences across different income levels demonstrate varied patterns affected by economic variables, personal interests, and socio-cultural influences. At lower income brackets, consumers are likely to purchase only necessary products and services, most of which will be directed towards meeting necessities such as food, shelter, and transportation. The more money an individual has, the more likely the person will pay for non-essential items, like expensive clothing, entertainment, and travel.

Some major distinctions in consumer preferences include:

Basic Needs vs Luxury Goods 

Basic needs are goods associated with daily survival. Products related to food, hygiene, daily sustenance, and lifestyle costs are usually associated with basic needs. Luxury goods, on the other hand, are products associated with improving lifestyle, comfort or status. Consumers with a higher disposable income also aim to select luxury status in basic needs, while consumers with lower income aim to fulfil basic needs at the cheapest alternatives. Consider the notion of dining at home to save money and eating out at a fancy restaurant. The action associated with it, i.e., food, is a basic need, but the way the need is fulfilled is subject to consumer preference.

Quality vs Price Sensitivity 

Consumers whose income is lower often pick cheaper options, although they might be of lower quality, whereas wealthier consumers may buy luxury goods well-known for better craftsmanship and longevity. Price sensitivity, in this regard, becomes the fulcrum on which the consumer preference rotates. While the cheaper products might be of similar quality as their more expensive counterparts, consumers will always aim to try and buy the one that they consider most value for money.

Status and Social Class 

Consumers always try to find the best brands associated with their price points. In this regard, brands often come to be regarded as being synonymous with status or social standing. Certain brands are associated with luxury, and others are associated with value for money. High-end consumers with increased disposable income have a propensity to lean toward luxury products for the sole purpose of flaunting the brand. 

Consider brands like Louis Vuitton, Armani, Rolex, or Prada. What’s the first adjective that comes to your mind when you hear of these brands? The answer is luxury. And concurrently expensive. This mixture of expensive and luxury is what drives these brands.

Consumer Decision-Making Models

There are four basic types of consumer decision-making models that explain the approach consumers take towards buying. It is crucial in this regard to note that the models, being theoretical, do take some assumptions into account to maintain consistency. The four types are as follows:

Economic Model

The economic model envisages the consumer as being practical and economical while making purchases. The consumer ideally decides what they want without being influenced by a marketer, marketing strategies, or ads. The word “ideally” should be taken special note of in this model because the model assumes that the consumer is perfectly rational and not at all emotional.

Passive Model

The passive model is absolutely polar opposite to the economic model. As per the model, the consumer procures a product solely because they come across marketing efforts made by the company via ads or other promotional material. Much like the economic model, this also is an idealistic model since it considers the consumer’s purchases to be wholly determined by marketing efforts and not by the consumer’s choice.

Cognitive Model

The cognitive model considers the consumer to make purchases as per their idea of market demand. As per this model, the consumer is neither wholly rational nor subject to the whims of the company’s marketing strategies. The cognitive model is similar to real-life scenarios because the consumer is the sole decider subject to their decision-making abilities without any absolute bias.

Emotional Model

The emotional model considers the consumer to have an emotional worldview when investing in a product. The person does not consider the practical aspects of how the product might be useful practically, but just the emotional connection. The consumer under this model’s consideration is an impulsive being and makes decisions fast. Thus, they might be exposed to marketing strategies more than consumers under the cognitive model.

Conclusion

The link between what people desire and what they can afford plays a key role in the economy. For example, as people's salaries improve, they tend to spend more, and tax cuts can also impact what they buy. This relationship between aspirations and financial means influences how firms and consumers choose. By recognising and responding to these changes, businesses can better address the shifting demands of the market, which ultimately benefits everyone.