Why is consumer theory important in the business sector?

Why is consumer theory important in the business sector?

Franco Brutti

Sep 18, 2023

Sep 18, 2023

Sep 18, 2023

Why is consumer theory important in the business sector?
Why is consumer theory important in the business sector?
Why is consumer theory important in the business sector?

Working in the business sector is not only about selling, but also about knowing how to sell well. This is the only way to make a good profit.

That’s why in this sector you must take into consideration various economic theories which, applied properly of course, will pay off.

Consumer theory is one of them and it’s also one of the most important of all. At the end of the day, understanding the needs of buyers is what will allow you to create better strategies to sell.

If you've never heard of this before, it's about time you did.

That’s why we’ve prepared this article so that you can learn all about this interesting theory.

What is consumer theory and what is its purpose?

If you have come this far, it’s because you are interested in knowing what consumer theory is. It’s a branch of microeconomics that focuses on the analysis of how consumers make their purchases.

In other words, it seeks to understand what leads consumers to buy certain things and to what extent external factors such as their purchasing needs, their level of income and the existing level of supply and demand interfere.

The aim of this theory is to understand how customers make their purchasing decisions so that companies can play the perfect cards.

When you start applying the theory, you will be able to make better decisions in the area of sales, marketing and pricing strategies.

In addition, it’s an economic theory that can be applied without any problem in any type of company, since it doesn’t focus on analyzing a single type of consumer specifically, it analyzes consumers in general.

Thus, based on the foundations of this theory, you will be able to understand what leads your customers to buy in your store and thus improve their entire experience so that they will always want to come back.

The seven elements that make up the consumer theory

To go even deeper into the subject and to understand how it can be applied, we must take into consideration the elements that compose it.

In the case of this theory, we find that it’s composed of a total of seven elements. Therefore, we will take the time to explain to you one by one what they are and what they are about:

1. Buyer preferences

The first and most important element of all is buyer preferences.

In the end, we are all consumers and you may well know that when you need to buy something, you feel preference towards some models, more than others.

Either because of the number of advantages you will get or because of the quality-price ratio it has.

Therefore, if you have a clothing store, for example, you should think about the possible preferences of your potential customers, which will surely be influenced by the fashion of the moment.

2. Budget restrictions

Another aspect that directly interferes in the moment of making a purchase is budgetary restrictions.

Keep in mind that your consumers receive a certain salary and have a variety of expenses to cover.

Therefore, they are not going to be able to afford to spend an infinite budget on the things they buy from you.

This is why you can rely on studies of your nation's salaries to find out what the general population's purchasing possibilities are.

3. Marginal utility

Now, when we talk about marginal utility, we are referring to the amount of utility that consumers can give to their wages.

As you can imagine, the greater the amount of expenses they have to cover, the less utility they can give to their money in general.

That’s why this is another element that is important to take into consideration.

4. Indifference curves

It should also be taken into consideration that in today's market, there are several goods and services that fulfill the same function.

For example, there are countless companies that offer Internet services or different models of televisions that, at the end of the day, do the same thing.

This generates an indifference curve in consumer decision making.

Changes can be generated to the extent that a buyer is willing to choose one good over another, and in this case the first differentiating aspect is usually the price of the product or service.

5. The consumer's equilibrium

Continuing with the list, we cannot overlook the consumer equilibrium.

This point is generated when a person has his indifference curve in line with his budget constraint.

Therefore, the utility he will give to his money in general will be much higher.

6. Price elasticity of demand

In the business world, the point of price elasticity of demand is one of the most important in general.

This is because it’s an important element for understanding how a change in price affects the supply or demand of a specific product.

Therefore, you should analyze the extent to which the prices of your products are changing to find out if it’s something that will help you increase your sales or if it’s something that will cause them to be reduced.

7. Consumer surplus

Finally, the seventh component of this theory is consumer surplus.

In this case, we find the value a customer is willing to pay for a product and the price they actually end up paying.

From here, it’s possible to better understand the economic welfare that customers receive when making a purchase.

The more surplus shoppers have left over, the better they will feel about their shopping experience.

The seven elements that make up consumer theory

Why is it important to know how to apply consumer theory?

Since you already have a more complete idea of what consumer theory entails, you will have a clearer perception of how it helps businesses.

However, if you still don't understand the importance of consumer theory, we'll go into more detail about it.

The truth is that, in general, as long as you apply this theory in the relevant departments of your business, you will be able to see a lot of advantages.

Therefore, to give you a better idea of why you should start using it, we will talk about the benefits of its application:

1. You will be able to understand consumer preferences better 

After conducting a market analysis with consumer theory, you will be able to understand what are the preferences of buyers in a specific sector today.

The idea is that you can use the results of these analyses to your advantage to make the appropriate changes in your company and ensure that buyers prefer your products.

The more you are in favor of buyers' preferences, the more people will make the decision to buy from you.

2. You will be able to create better marketing strategies

It should also be noted that putting yourself in the consumers' shoes is something that is also very useful for the marketing department.

After understanding their preferences, possibilities and limitations, you will be able to create better advertising campaigns that reach everyone in the best possible way.

That way, you can create effective promotions that appeal to buyers and attract the attention of a larger number of potential customers.

3. It will help you predict the demand for a product or service

Another benefit that you can enjoy by working hand in hand with this theory is predicting the demand for a specific good or service.

This is possible because, by knowing the preferences of most customers, you will be able to predict which products will begin to sell in greater quantities.

Of course, this will be information that you will have to use to your advantage in order to apply it and meet their requirements.

Of course, this will have to be done at the same time as adjusting the offer so that customers will choose to make purchases with your company.

4. It will allow you to better understand market behavior

Although this is an economic theory, it has a great impact on today's market.

If you have been working in the sales world for a long time, you will already know that the market moves fast and this means that trends change very frequently.

Now, understanding how these changes are executed will allow your company to be prepared to overcome them, in case they are negative, or take advantage of them, in case they are positive.

5. Facilitates business decision making

As you can imagine, since it is a theory that can be applied in so many studies and market analyses, working with it will allow you to make better business decisions.

In addition, if you are an entrepreneur who is often indecisive or unclear about what to do on many occasions, having the help of this theory is essential to make the decision-making process much easier.

This is also positive because it will allow you to save work time that you can invest in other business activities.

6. It’s a theory that contributes to social welfare

Last but not least, it should be noted that, in its application in the general market of a country, it’s of great help in improving the social welfare of communities.

Provided it’s well applied by governments and large companies, consumer theory can generate positive changes in society.

For example, it can be applied to promote the purchase of national products or encourage the consumption of healthier products.

Thus, we are dealing with a theory that, in addition to generating changes at the micro level, can also generate them at the macro level.

Why is it important to know how to apply consumer theory?

Examples of the application of consumer theory

To conclude our article, let's review some good examples of how this theory can be applied so that you understand the level of its implication.

Let's say you work with a food manufacturing company.

By taking into account what consumers' preferences are and the percentage of money they are willing to spend, you will be able to better understand what foods they are looking to buy.

For example, in today's day and age, there is a large percentage of the population that is converting to veganism or is seeking to eat healthier.

Therefore, companies are forced to take these results as a signal that they either need to make other types of food products, or they need to come out with new versions of them that are healthier.

The same could happen with a clothing store: with the return of a more relaxed and even eighties style, it’s necessary to create pieces of clothing that adapt to this trend if sales are to increase.

And so on with any type of company and the needs of its potential customers.

In conclusion, the consumer theory, beyond giving you a series of fixed steps to always comply with, will teach you to understand what your customers need according to the type of business you have.

So, you can be sure that if you apply it well, you will obtain excellent results and you will see improvements in the area of sales.

Let us know in the comments your opinion on the subject and if it’s something you would apply to improve your business.