Module 4 Consumption

Module 4Consumption

What is it?

Society of mass production and consumption People who possess a lot of buying power

are admired Consumer demand is stimulated through

marketing techniques The act of using goods and services to satisfy

needs and wants. Opposite of production Easy access to credit

Production of goods whose obsolescence is planned

4.1.1 Factors of consumption

Disposable income The income left over after all

expenses have been paid. Money at our discretion to

spend on goods & services. Determines our consumption.

Deferred consumption.

Price effect There is generally an inverse relationship

between price and demand Inferior goods

Goods that decrease in demand as income rises Generics vs. name brand

Normal goods Goods that show a constant demand

despite changes in income.

The substitution effect Depending on their disposable income

people may decide to substitute one product for one that is similar such as:

Hamburgers for filet mignon Civic for trans am Hydro for solar Disposable products for durable ones

Conspicuous consumption The desire to display your wealth or to be

identified with a particular social group Law of diminishing marginal utility Factors that determine patterns of

consumption Religion Age Gender Price / Disposable Income Education Needs and Wants

4.1.2 The importance of advertising

What is it?

The image above is a “coke” bottle. This is one of the most recognizable

symbols of popular culture. The first coke was sold in 1886. For the

year 1886-1887 the company sold nine bottles per day,

Since then the Coca Cola company sells 1.5 billion drinks daily

Coca Cola is one of the largest multinational corporations employing over 90 000 people and operating in over 200 countries.

Marketing is much more than an advertisement Identifying customer’s needs in order to provide

goods and services to exploit them. “Necessity is the mother of invention”

Planning and executing a campaign from the conception of a product to the delivery to consumer.

Four P’s of MarketingPriceProductPlacePromotion

Target Market

Market The group of potential consumers who

share common needs and wants. The target market has the ability and

willingness to buy the product. Businesses strive to meet the needs and

wants of their customers.

Mass Marketing A single marketing plan used to reach all

consumers.

Target Market The group of consumers that a

company desires to have as customers.

Market Segmentation Dividing the entire market into smaller

groups (of people) who share similar characteristics.

Allows businesses to customize products and marketing strategies.

Demographics Segmenting the market based on personal

characteristics such as age, gender, income, ethnic background, education and occupation.

Example: middle class, males, ages 20-40, who are construction workers.

Age Demographics Baby Boomer Generation

9.6 Million born between 1946-1964Posses 51% of the wealth in the countryLarge discretionary/disposable incomeLike Luxury/Recreational Items

Generation X2.8 Million born between 1965-1972Product of dual income households/divorceSavvy & Skeptical ConsumersFinancially CautiousLike sharp images, music, sense of humor

Age Demographics Generation Y

9.1 Million born between 1972-1992Computer GenerationAccustomed to interactivityMillions in spending power/influences

billions in purchases Generation Z

7.3 million Born between 1993-2011Grew up with 9/11Cell phones/computers/MP3’s/Tech SavvyStill growing and mysterious demographic

Psychographics Segmenting the market based on values,

attitudes and lifestyles. Example: People interested in

professional football.

Geographics Segmenting a market based on where a

person lives. Geographic segmentation can refer to local, regional, national or global markets.

Example: A small local store will segment to the surrounding area like a town, while big companies like Nike market Internationally.

Behavioral Segmentation Dividing consumers into groups

according to their response to a product. Behavioral segmentation divides markets into groups based on what they are looking for in a product and why they buy the product.

Example: Purchasing Nike shoes because Michael Jordan wears them.

Advertising To increase the demand for the good or

service Instructs, Promotes and Reinforces

Products or Organizations

Questions companies consider before launching a campaign.

What are the product’s unique selling points?

What are hidden qualities important to the buyers?

Is there adequate demand for the product? How much to invest in venture? Who are you targeting? What is the objective of the campaign?

Types of Advertising Objective

Generally informs and appeals to the intellect

Subjective Appeals to emotions and our

subconscious desires Characteristics

Use of celebrities Models who are young, attractive,

sexy Escape ads Association with money, power and

success

Misleading Illegal in Quebec Examples

Bait and Switch % off without indicating original price Lowest price in town!

Advantages and Disadvantages Pros

They inform consumers Mass consumption due to advertising

leads to mass production and therefore lowers cost

Allows for competition which drives prices lower

Creates jobs

Cons Encourages impulsive consumption Manipulates consumers Sells images and perceptions Increases price of a product Seeks conformity

Promotes questionable social conduct

Not all ads are made equal Evaluating different types of ads

TelevisionRadioPrintInternet Product PlacementPoint of purchase

Commonly used advertising techniques Information Unfinished comparison Status Peer approval Hero endorsement Sexual attraction Entertainment Intelligence Independence

Do not be fooled by advertisements Does the ad appeal to your emotions? Look beyond the appeal to find out

what the ad really says What is unique to the product? Be alert to ads that are misleading Read the fine print

4.2.1

Credit is the lending of money to enable the purchase of goods and services now but pay for them at a later time.

Enjoy the use now Use other’s money Pay interest on capital Pay the whole capital amount

Terms Debtor – Borrower Creditor – Lender Interest – The cost of borrowing

someone’s money

Obtaining CreditThe three C’s of credit Character

References may be demanded Capacity

Are you able to pay Look at some information such as:

Income, Debts & Job stability Collateral

Assets that could be seized if loan is defaulted

Credit Bureau (Such as Equifax) Collect credit information about consumers

and sells this information to lenders. They investigate references and

employers. Bureau has credit history on anyone who

has used credit. Assigns a credit rating which assesses the

probability of repaying the loan and interest when they are due.

Record will show if you have any outstanding debts, failure to pay etc…

Types of consumer credit

Personal Loans Available from financial institutions Advertise lowest rate, but not everyone

qualifies Collateral needs, perhaps an endorser Payment plans Once signed, pay that interest rate

until final payment which includes interest and capital.

Credit Cards Variable Credit Issued by financial corporation or

retail store No interest if total is paid before its

due If amount not paid in full, monthly

payment is required Interest can range from 9-28.8% Some cards require membership fee Both consumer and retailer pay fees

Lines of Credit Predetermined credit limit Open ended Usually preferential rates

Installment plans Credit which is paid off in parts. Common when purchasing a car,

furniture, major appliances and other big ticket items.

Interest rates are high The items can be seized until the last

payment has been made.

Mortgages

Mortgages Amortization

The repayment period 15 – 40 years

Foreclosure Seizure of property

Deciding to buy a house Preferences Achieve standard of living Responsibility of paying house off Golden Rule

House should not be more than three times your annual income

Taxes “Welcome Tax” , School Tax & Municipal

Tax Dependant on:

Size of property, Geographic Location, Services, Age of the house & Zoning

No more than 40% of monthly income should be spent on housing cost

No under the table contract Illegal, Risk losing investment

Must be legal transfer of house through notary, with two witnesses present

House should be inspected before transfer

Risks of hidden defects

Types of Mortgages Open

The principal balance may be paid back at anytime without penalty Higher cost due to higher rate of

interest Benefit is paying off the mortgage in

less time Closed

Limits amount that can be repaid 10% of principal may be paid on the

anniversary date of the mortgage

Interest Rates Fixed Variable

Rate is determined by market rate. New products

Points of interest The longer you choose to pay off the

house, the greater the total cost due to interest. Tips

Pay down loan as quickly as possible. Take advantages of opportunities to do so. A single payment against principal

can lead to savings of many times the initial amount.

Debt

Debt: money owed Ex: mortgage, bank loan, credit card Debtor: person who has to repay the

money that was given to them. Creditor: institution that gave the money Ex: banks, credit card companies Short term debts: money owed in which

the debtor can pay off easily/regularly Ex: phone bill, gas, groceries, etc.

Dealing with Debt1. Design a Personal Plan See a financial advisor Create a budget and reduce expenses Consolidate (unite all debt) and use a

personal loan Destroy credit cards Sell some assets Renegotiate with creditor Increase income This option will allow the debtor to keep their

property

2) Repossession Creditor takes back goods that were

purchased All payments that have been made on the

debt are now lost to the debtor Debt no longer exists

3) Voluntary deposit Exists only in Quebec Debtor arranges to have a percentage of

his/her salary with the Provincial Court The percentage is determined by the court Money will be used to pay off debts Prevents repossession

4) Personal Bankruptcy Debtor admits that debts cannot be repaid Debts total more that debtors assets Debtor turns over all assets to a trustee,

who will divide it among the creditors. Debtors can keep necessities and tools

needed to have an income All debts a cleared except: fines, student

loans, alimony/child support) Lasts 9-18 month, most have a fresh start

afterwards

Personal Budgeting

Budget: a way of managing your income (weekly or monthly) and expenses

Puts you in control Determines discretionary income (left over

after all expenses) Helps manage debt and monitor your

costs Promotes savings

The budgeting process

1) List your estimated income Net income (money left after taxes and

deductions on payment) Gifts, allowances, and other sources of

income BE HONEST, don’t include any income

that is not certain

2) List your probable expenses Fixed expenses (regular bills). Ex: phone

bill, hydro, insurance, rent/mortgage Variable expenses. Ex: clothing, luxuries,

entertainment Savings NOTE: there will be unexpected expenses

(ex: repairs, medical, etc.). Therefore, having a savings will help with these.

3) Balance income against expenses Total your expenses and your income Subtract your expenses from your income. If there is a surplus this means you have

successfully created discretionary income for yourself.

If you cannot make ends meet you will have to readjust your expenses