The study of consumer behavior attempts to demonstrate how individuals make selections while shopping. It examines the reasons behind those choices. The idea is that once a company can identify why one product is preferred to another, it can work to improve, or change the marketing idea around the less favored item in order to increase its appeal to consumers.
Ordinal utility is founded on the idea that consumers have basic, rational preferences, and they make their decisions based on these preferences. The actual degree of the preferences is not measured or measurable; only the actual rank is considered important. For instance, if you watched a consumer choose to purchase Cheerios over Frosted Flakes, you could observe that he ranks Cheerios as having a higher ordinal utility. You could record how many people prefer Cheerios to Frosted Flakes, but ordinal theories would say that you could never determine, numerically, how strong the Cheerios preference is.
Cardinal utility attempts to understand the degree of consumer preferences by measuring this degree in terms of differing value. For instance, in your Cheerios observation, if you offered a box of Frosted Flakes that contained twice as much product for the same cost and the consumer still chose Cheerios, you could then say that the preference is at least greater than twice the value of Frosted Flakes. In this way, cardinal theorists attempt to show how consumer preferences are based on overall value and utility of a product, ideally to suggest a rise in offered product of certain brands to influence consumer behavior.
The Von Neumann-Morgenstern Utility Theorem attempts to combine ordinal and cardinal utility theory with four state theorems, beginning by stating that an individual does have a specific set of preferences. Second, it is assumed that those preferences are consistent across multiple options. Third, there is a point at which value can make a lower choice worth more than an initial preference. Finally, each consumer has her own utility equation, even if it seems arbitrary, that influences the utility functions for her independently.
Convenience, as a consumer quality, shows the difference between these theories. If you consider convenience an ordinal quality, it can become a primary ordinal quality as consumers begin to make choices not between products, but between potential products within the category of convenience. Similarly, cardinal theorists suggest that convenience plays into the overall utility of a product, raising the overall utility of more convenient products in order to compete with items of lower convenience. Alternately, a VNM theory suggests that at some point in quality, the convenience of a product is no longer enough to convince consumers to purchase an inferior item.
- "The Quarterly Journal of Austrian Economics"; The Modern Theory of Consumer Behavior: Ordinal or Cardinal?; William Barnett II; Spring 2003
- Consumer Psychologist; Consumer Psychology: The Psychology of Marketing; Lars Perner; 1999
- "Econometrica"; Additive Von Neumann-Mortgenstern Utility Functions; Robert Pollak; July-October 1967
- Photo Credit Ryan McVay/Stockbyte/Getty Images
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