Everything you buy in a given year from a gallon of milk to a new car is tracked and added to a list that determines consumer buying power. This list helps companies understand where the marketplace is heading and what consumers are actually spending money on versus what a company believes consumers want to purchase.
Definition of Consumer Buying Power
Consumer buying power is the behavior of a consumer in regards to how he spends money on goods or services. For example, an individual might have $1,000 per month to spend on goods after he pays taxes. This sum of money is known as his consumer buying power because it is the amount he is able to contribute to the economy through purchases. This amount is then divided among actual purchases to find out how buying power divides up among different industries such as entertainment, food, housing and clothing.
Effects on Consumer Buying Power
Consumer buying power does not remain static year after year. Changes in the value of the currency, inflation of product prices and average wages all factor into the buying power figures. Higher prices might mean that buying power shifts to necessities such as clothing and housing and away from entertainment. Conversely, if it is found that average wages are increasing and the prices are remaining low, then buying power can shift toward industries that fulfill the wants of consumers as well as their needs.
Collecting Data on Consumer Buying Power
The data available on consumer buying power is collected by The Nielsen Company and delivered in an annual report. This information is used by companies to track consumer behavior in their industry and may determine how they proceed in the next year. For example, a jewelry company finding that consumers are shying away from expensive diamonds might opt for less-expensive alternatives to offer consumers. Clothing manufacturers might find that higher consumer buying power can mean clothing can be made at a higher expense and sold at a higher price.
Buying Power Vs. Purchasing Power
Consumer buying power should not be confused with consumer purchasing power. Purchasing power dictates how much of a good can be purchased with a specific amount of money. This changes over time. According to Consumer Price Index figures, for example, the average cost of a pound of ground roast coffee in January 2004 was just under $3. By January 2014, the average cost rose to just over $5.