One in seven American households lives in poverty. Another one in six can afford only basic necessities, such as housing, food, and health care. This state of affairs suggests that nearly one in three U.S. households must carefully plan its budgets and spend accordingly.
Budget allocation and spending behavior models often implicitly assume that shoppers with budgets are knowledgeable about the total price of their shopping baskets as they shop. However, because shoppers’ estimates of the prices of their shopping baskets mediate the relationship between budget allocation and actual in-store spending, it is critical to understand whether and how they estimate this total price. Inaccurate estimates could have notable implications for both consumer welfare and retail performance.
Yet despite the importance of understanding how shoppers on predetermined budgets might estimate the total price of their shopping baskets, it remains largely unclear whether, when, and how they keep track of in-store spending. This study has three objectives: (1) to determine whether and when budget shoppers keep track of how much they spend while shopping, (2) to understand how they estimate the total price of their shopping baskets, and (3) to examine the implications of estimation biases for consumer welfare and retail performance. The authors conduct this research in the context of grocery shopping, for which people shop multiple times per month and often spend 15%–20% of their income on ten or more items per trip.
A field study and two laboratory studies offer four key generalizations about budget shoppers in grocery stores: (1) They predominantly use mental computation strategies to track their in-store spending, (2) they adapt their mental computation strategy to the dominant range of price endings of items in their shopping baskets, (3) those who try to calculate the exact total price of their basket are less accurate than those who estimate the approximate price, and (4) motivated shoppers are less accurate than less motivated shoppers (because they tend to calculate instead of estimate the total basket price).
Shoppers who overestimate the total basket price likely spend less than they budgeted for––that is, they do not maximize their own utility under the budget constraint. Furthermore, they might reallocate the “saved” money to a different (mental) account, which could entail a financial loss for the retailer. Shoppers who underestimate the total basket price are more likely to spend more than their grocery budget, in which process they unintentionally reallocate more money to the “grocery account.” This reallocation in turn may trigger a chain of budget and spending decisions that could cause shoppers significant financial distress. A second field study demonstrates that shoppers who underestimate the total price of their basket are more likely to overspend, leading to negative store satisfaction.
Educating shoppers about computational estimation strategies may enable them to become more informed shoppers, turning wild guesses into more educated ones. In turn, consumer welfare should improve, because shoppers can maximize their utility given their budget while minimizing the likelihood of spending more than they can afford. Alternatively, enabling budget shoppers to accurately track their in-store spending—for example, using shopping cart scanners—may represent a win–win solution, enhancing consumer welfare and retail performance.
Koert van Ittersum is Assistant Professor of Marketing in the College of Management at Georgia Institute of Technology. He received his PhD from Wageningen University (the Netherlands). His current research focuses on reducing Type I and II errors during new product and technology introductions and behavioral biases that stimulate overspending of money and overconsumption of drinks, foods, alcohol, and medicine. His research is published or forthcoming in leading marketing journals, such as Journal of Consumer Research, Journal of Marketing, and Journal of Marketing Research, and premier medical journals, such as Annals of Internal Medicine, and British Medical Journal. He is a current member of the editorial board of Journal of Experimental Psychology: Applied.
Joost M.E. Pennings is Professor of Marketing and Alex Investment Bank Professor of Finance at Maastricht University, the Netherlands; AST Professor in Commodity Futures Market at Wageningen University, the Netherlands; and research fellow in the Office of Futures and Options Research at University of Illinois at Urbana–Champaign. His current research deals with understanding economic behavior by studying the decision-making behavior of real decision makers (e.g., market participants, consumers, managers). His research has been published in economics, finance, and management journals, such as American Journal of Agricultural Economics, Economics Letters, International Journal of Research in Marketing, Journal of Banking & Finance, Journal of Business, Journal of Financial Research, Journal of International Money & Finance, Managerial & Decision Economics, and Management Science.
Brian Wansink is John S. Dyson Professor of Marketing and Director of the Cornell Food and Brand Lab at Cornell University. He is author of more than 100 academic articles and books, including the best-selling Mindless Eating: Why We Eat More Than We Think (2006) along with Marketing Nutrition (2005), Asking Questions (2004), and Consumer Panels (2002). From 2007 to 2009, Wansink was granted a leave of absence from Cornell to accept a presidential appointment as Executive Director of U.S. Department of Agriculture’s Center for Nutrition Policy and Promotion, the federal agency in charge of developing 2010 Dietary Guidelines and promoting the Food Guide Pyramid (MyPyramid.gov).
Journal of Marketing, Volume 74, Number 2, March 2010o
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