Tag: MBA

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One-Minute MBA Concepts – The Law of Demand

Economics is all about scarcity, and scarcity drives pricing. Most people have a general understanding of the interplay of supply and demand without really knowing how it works. As one half of the supply/demand interplay, the law of demand states that the quantity demanded rises as price falls. This takes into account two items, the substitution effect, which indicates price changes relative to another good, and the income effect, which says that the change in price changes disposable income.

If the demand curve is linear, the relationship can be estimated with the demand curve formula Qd=a-b(P), whereas Qd is the quantity demanded in number of units, a is a constant which represents the demand determinants (this is the X intercept), b is the relationship between Qd and price, which is a negative (inverse slope of the demand curve), and P is price.

The demand curve slopes downward on a graph. This is because consumers are always willing to buy more goods at a lower price. Typically, demand shifts from demographics, prices, income, and consumer tastes and trends. Firms with market power can also impact demand with advertising.

Keep in mind, this formula is only used as an estimation of demand, as real-world applications are not linear.

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One-Minute MBA Concepts - High-Effort Consumer Behavior: Decision Making

High-effort consumer behavior involves central-route processing, meaning that it takes a consumer a conscious effort to change or to form their attitudes about your product. High-effort purchases are often thought of as cars, homes, or other high-priced items, but they aren’t always determined by price. High-effort behavior consumers follow a specific, five-step process. This involves: 1. Problem recognition 2. Information search 3. Evaluation of alternatives (often called the consideration set) 4. Purchase decision and 5. Post-purchase evaluation.[1]

In high-effort behavior, depending on the consumer and their habits, a typical consideration set ranges from 2–8 alternatives.[2] Marketers of high-effort consumer behavior need an in-depth understanding of each step of this decision-making process for their brand to be part of a customer’s consideration set. A high-effort marketer’s typical day involves trying to get their target consumer to recognize a problem by introducing an incongruence between their actual state vs. their ideal state. Basically, we try to create reasons for them to want something better than what they currently have. In my experience, however, the really good high-effort marketers understand cognitive miser theory and are experts at information search. This approach is less about style, and more about substance. They are experts at providing information that helps their consumer solve a problem.

What’s been your experience with high-effort behavior?

[1] Hoyer, W., MacInnis, D., & Pieters, R. (2018). Consumer Behavior (Seventh Edition). Cengage Learning: 180–199.

[2] Shocker, Allan, Ben-Akiva, Moshe, Boccara, Bruno and Nedungadi, Prakash. 1991. Consideration Set Influences on Consumer Decision-Making and Choice: Issues, Models, and Suggestions. Marketing Letters: A Journal of Research in Marketing, Vol. 2, №3: 181–197.