Based on research by Hajo Adam (former Rice Business professor), Otilia Obodaru (former Rice Business professor), and Adam D. Galinsky

• How individuals construe themselves varies by culture and gender.
• New research shows people with an independent self-construal are more likely to locate the self in the brain; those with an interdependent self-construal are more likely to locate the self in the heart.
• Where people locate the self influences their decision-making, especially on hot-button topical issues.

The Greek maxim, “know thyself” has, for millennia, entreated philosophers, scholars, spiritual guides and common men to understand one’s self in order to gain wisdom and perhaps better lead others. But where does the abstract sense of “the self” actually reside? Could it be in the body? And if so, which part?

Researchers have recently determined that the construct of the self does indeed require better understanding of the physical body and various aspects of it. For example, people often link the abstract concept of moral purity to physical cleanliness, or the concept of power to expansive body postures. Social scientists have tended to back Hippocrates’ view: “both joys and sorrows come from nothing else but the brain.” The study of memories and personal aspiration, for example, have led social scientists to the conclusion that the brain, from which these self-defining features seem to spring, must beget the self. And neuroscientists obviously agree, not questioning that the self resides in the brain, they directly study which specific areas of the brain are associated with the self.

However, former Rice Business professors Hajo Adam and Otilia Obodaru, with colleague Adam Galinksy of Columbia Business School, recently completed a study that shows people’s perception of the location of the self in the brain is not a given. Various parts of the body, such as the eyes and the stomach, also are considered to be locations for the self, while the brain and the heart have stronger connection with the self-concept than other parts of the body.

Furthermore, according to the research, where people believe the self to be located is strongly correlated with culture and gender. Because U.S. citizens and men are more likely to have an independent self-construal — that is, their sense of self is characterized by separateness from others and a valuing of their own personal goals over the goals of the group — they tend to select the brain as the location of the self. Indian citizens and women tend toward an interdependent self-construal, one that links connectedness to others with one’s self-concept, and tend toward finding the self within the heart.

Why does the location of the self matter? Obodaru and Adam found that where an individual locates his or her sense of self can actually affect decision making. In one of their studies, participants were asked to consider being cloned and informed that they’d need to choose from which part of the body the cloning cells would be harvested. They were told that because some body parts are more connected to a person’s sense of self, their cells have a higher capacity to produce a clone that is identical not only in appearance but also in terms of identity and sense of self. Participants chose the brain most often (44 percent) followed by the heart (25 percent). And, as expected, men and Americans were more likely to choose the brain than women and Indian citizens.

These types of decisions held for all types of dilemmas — from those related to giving to a charity that supported heart-related illness or those related to brain disorders, such as Alzheimer’s, to those related to end-of-life decisions.

For example, people who believed that the brain contains the self contributed more than twice as much money to a charity fighting Alzheimer’s than people who believed that the heart contains the self. The reverse pattern also held true: People who believed that the heart contains the self contributed more than twice as much money to a charity fighting heart attacks than people who believed that the brain contains the self.

Furthermore, people evaluate information more favorably when it is congruent with their brain or heart preferences. And that’s important for business. Developing organizational commitment, managing work role transitions and work and non-work boundaries and achieving leadership success all require understanding employees’ self-concepts — both for the employees and the employers. For example, a brain-based person may be more sensitive to competence-conveying information, but less sensitive to warmth-conveying information. A heart-based person may more readily develop affect-based trust. Taking the time to develop messaging in such a way as to tug at those employees’ self-concepts allows us to better align the company’s goals with the employees’ goals.

The same can be true for external audiences as well. Leadership speeches, entrepreneurial pitches or marketing materials that invoke the heart or the brain could be differentially persuasive, depending on the recipient’s perceived location of the self.

Hajo Adam is a former assistant professors of management at Jones Graduate School of Business at Rice University

Otilia Obodaru is a former assistant professors of management at Jones Graduate School of Business at Rice University

To learn more, please see: Adam, H., Obodaru, O., & Galinsky, A. D. (2015). Who you are is where you are: Antecedents and consequences of locating the self in the brain or the heart. Organizational Behavior and Human Processes, 128, 74-83.

Based on research by Ajay Kalra, Darron Billeter and George Loewenstein

• If you have a good product, you might think consumers just need to try it in order to buy it.
• But that can backfire if using the product means learning a new skill. Frustrated consumers might give up before learning to love it.
• Marketers should consider approaches that lessen the need for consumer training — or else inspire consumers to keep trying.

Consider this: 25 percent of first-time snowboarders don’t take a lesson because they think that snowboarding will be a piece of cake. Then after trying it, 85 percent of these people quit and never become long-term participants in the sport. What happened? Why didn’t the snowboarders stick with it?

It’s a basic marketing premise. If you’ve come up with a good product, all you have to do is get people to give it a try. Once that happens, they’ll realize how great it is and buy it.

Offer free samples of a tasty new treat, and that might be the case. But if the product requires consumers to master a new skill, letting them just give it a try can backfire. That first, unsuccessful encounter can lead to frustration, dissatisfaction and a customer who is lost forever.

Consumers are bad at predicting how well they’ll do with a new task, research shows. So if the task is tough, and someone has an ego-deflating initial experience with it, he’ll focus on the hard part and discount any moments of success.

In a study of more than 300 subjects, Rice Business marketing professor Ajay Kalra and his two co-authors, Marriott School of Business marketing professor Darron Billeter and Carnegie Mellon University economics and psychology professor George Loewenstein, looked at how people assessed their performance with a new skill-based product before and after realizing the gadget required a learning curve.

Before trying the product, participants overestimated both how good they’d be at operating it, and how much work it would take to learn. Then, after their first try, the overconfidence turned into pessimism. The subjects’ newly gloomy outlook led them to miscalculate their future performance with the product: They assumed they’d do worse with it than they actually did, and that they’d have more trouble learning a new skill than was the case.

There’s more. One debilitating bad experience prompted subjects to devalue the product associated with it. They reacted this way even when the researchers cautioned them ahead of time not to lose confidence.

In the first part of the experiment, subjects were asked to trace a shape using only its reflection in a mirror, and to predict how many correct mirror traces they could complete in four rounds. The next time around, the researchers offered a friendly warning: before giving it a try, they told the subjects, most people assume they’ll do better at mirror tracing than they actually do, and that after they try most people predict they’ll do worse than they actually do.

Despite the warning, and despite hearing it repeated after each round of tracing, the subjects’ estimates of their success didn’t change. They still overestimated themselves at the start, and then after that discouraging first experience, consistently low-balled their chances of success at each successive round.

Though the response seemed irrational, it tracks with the way humans learn. Early on, learning something new tends to be inefficient, slow and difficult. Eventually, though, most people transition into a second stage, in which learning is almost effortless. In effect, we need to learn how to learn. Too often, though, people give up before the easier stage. They find it hard to imagine a time when learning won’t be difficult.

So how can a business sell something innovative that requires fresh skills – say a new technology or a smart upgrade of an existing product?

First, this is not the time to use trials as a promotional tactic. That first trial could be the experience that turns a potential buyer off. Instead, target consumers in that rosy stage before they actually try a new product. If they’re invested enough before trying it, they may push through any problems until they get comfortable with it.

At the same time, offer ways to help new consumers maneuver the difficult early phase of learning. Free customer service support can help, as can complimentary training immediately after that first try with the product. Consider, too, designing products that play to consumers’ skills and strengths. Reduce the amount of learning needed to use a product – or ease the process with lots of support and encouragement.

When the going gets tough, in other words, the tough don’t always get back on their snowboards. More often, Kalra and his team found, first-timers walk away from endeavors that demand too many new skills too soon. Like all good instructors, marketers need to give customers both the proper skills and the lasting optimism needed to hang on for the ride.

Ajay Kalra is the Herbert S. Autrey Professor of Marketing at the Jones Graduate School of Business at Rice University.

To learn more, please see: Billeter, D., Kalra, A., & Loewenstein, G. (2011). Underpredicting learning after initial experience with a product. Journal of Consumer Research, 37(5), 723-736.

Based on research by Ajay Kalra, Shibo Li (Indiana) and Wei Zhang (Iowa State)

Key findings:

• People update their beliefs based on various information sources, but the information they receive is often biased and, on the whole, contradictory.
• When new negative information is not clear-cut, specialist physicians are less affected, because these traits improve their ability to discern the nature and quality of biased information.
• Firms could forfeit revenue when they don’t understand how different types of customers respond to contradictory information.

We’re surrounded by health headlines that contradict each other. One might say, “Organic food reduces cancer risk,” while another warns, “Organic food consumption is linked to higher cancer risk.” Faced with conflicting information, consumers must decide what — or whom — to believe.

Physicians face similar dilemmas. They must decide whether to continue prescribing a medication when new evidence is conflicting or unclear.

Consider Avandia, a once-leading diabetes drug. On the same day the New England Journal of Medicine published a 2007 study linking Avandia to increased cardiovascular risk, it also ran an editorial criticizing the study’s methods. Other major sources, including the FDA, published conflicting guidance — some supporting continued use, others raising concern.

With no clear consensus, physicians had to decide: keep prescribing, or switch to an alternative?

Under circumstances where new negative information about a drug is not clear-cut, how might a physician’s belief about the quality of the drug and, ultimately, future prescriptions be influenced? The answer may depend on whether the physician is a generalist or specialist.

To understand how physicians respond to unclear negative information, Rice Business marketing professor Ajay Kalra and co-researchers Shibo Li (Indiana) and Wei Zhang (Iowa State) studied physician behavior following the Avandia controversy. They developed a model showing how doctors draw on multiple, often biased, information sources — including news, sales reps and patient feedback — to update their beliefs about a drug’s safety and efficacy.

The researchers assumed — accurately — that physicians often confront biased and contradictory information. Journalists don’t just report facts; they often editorialize. Likewise, pharmaceutical sales reps are trained to promote their own products, offering free samples and persuasive talking points. In this noisy environment, it’s hard to separate fact from spin.

Kalra and his team collected data from January 2006 to October 2007 — before and after the Avandia controversy erupted. They tracked the prescribing patterns of 1,500 physicians — specialists, hospital-based primary care doctors and office-based PCPs — along with marketing activities from pharmaceutical reps.

They also analyzed 112 print and online articles related to Avandia, classifying 65 as negatively biased and 47 as positively biased.

The researchers found that different types of physicians responded differently to the conflicting news. Specialists were less likely to let the noisy information landscape influence their prescription decisions than generalists (PCPs).

Why the difference? The researchers speculate that specialists were better able to critically filter and assess new information because due to greater expertise, more peer interaction and higher self-efficacy. By contrast, generalists, particularly those in private offices, tend to have lower risk tolerance and are more likely to rely on outside sources, including sales reps and patients.

Drugmakers also responded to the Avandia controversy — but not in the most effective way. They reduced marketing to office-based PCPs, even though those doctors were the most influenced by the negative news. They maintained or increased marketing to specialists and hospital-based PCPs, who were less likely to change their prescribing behavior.

The result? Many office-based PCPs stopped prescribing Avandia and switched to metformin, an older competitor.

In short, specialists and generalists don’t process information the same way. What does this mean for patients? When new information about a drug emerges — especially if it’s contradictory — your doctor’s response may depend on their professional context and background. 

Kalra, A., Li, S., & Zhang, W. (2011). “Understanding responses to contradictory information about products.” Marketing Science 30(6), 1098-1114.

Based on research by Amit Pazgal, David Soberman and Raphael Thomadsen

• Shrinking markets don’t necessarily mean shrinking profits, and growing markets don’t necessarily mean growing profits.
• Game theory and competitive analysis indicate that if market shrinkage is gradual and predictable, managers can boost profits by raising prices for committed customers.
• So, managers would be better off focusing on retaining committed customers who sit at the core of market demand.

In large measure, executives are judged by whether they make strategic decisions that, over time, increase profit. Imagine this: Your next promotion depends on how accurately you assess the attractiveness of different market opportunities. Would you rather compete in a growing market or a shrinking market? What if you were sure that no rivals would enter or exit, regardless of the market that you select? Are you certain which market would better fatten the coffers of your firm?

If you think that a growing market is always the safer bet, then think again. In certain conditions managers could be better off in a shrinking market – where consumers are exiting – than in a growing one according to findings presented in a study done by Amit Pazgal, Rice Business marketing professor, and co-authors David Soberman, professor of marketing at Rotman School of Management, and Raphael Thomadsenunder, professor of marketing at Olin Business School. What’s the rub?

On the one hand, the advantage of shrinking markets is rooted in understanding the behavioral responses of different segments of consumers. In essence, when customers withdraw from the market because they are dissatisfied with competitive offerings, they are often part of the segment of consumers least committed to the category in the first place. In contrast, the segment of consumers who remain in the market because they see value in the offerings is one willing to accept sufficiently higher prices that can compensate for volume-related losses firms would suffer due to the market shrinkage.

On the other hand, the profit potential of shrinking markets is rooted in understanding how firms respond to competitor actions in the marketplace. Pazgal and his co-authors use game theory and competitive analysis to develop three analytical models that demonstrate how profits can grow when markets shrink gradually and predictably. They develop three key assumptions to help clarify the matter.

First, they assume that two price-competitive firms offer differentiated products such that there is at least some degree of price elasticity of demand for each product. Second, they assume that individuals fall into one of three categories: (1) core consumers (i.e. those devoted to the product category and willing to accept higher prices); (2) edge consumers (i.e. those less committed to the category and more likely to exit the market); and (3) non-buyers (i.e. those who choose not to buy from either firm in the market). Third, consistent with how marketplaces actually evolve, they assume that each firm is located closer to core consumers than to edge consumers.

Regardless of whether edge consumers or even some core consumers leave the market, each model reveals sufficient conditions for profits to increase in shrinking markets. For example, in one model firms are presumed to compete on price in order to attract edge consumers to the market and to attract some core consumers away from the competition. However, after edge consumers leave the market, both firms are expected to raise prices for remaining core consumers and yield greater profits. What drives competitors to respond with industry-wide price hikes in the midst of market shrinkage?

As prices rise, each firm loses fewer consumers because edge customers have already jumped ship and the remaining core consumers are on deck and willing to accept the price hike because they perceive value in the offerings. In other words, the benefit of higher prices for devoted, core consumers outweighs the loss associated with serving fewer customers overall. As the market shrinks over time, price hikes have an increasingly negative effect on profits. In the bigger scheme of things, the growing absence of edge consumers in a shrinking market reduces competitive tension that would otherwise motivate firms to undercut each other’s prices. Under these conditions, instead of downward price pressure, the shrinking market actually encourages industry-wide, non-collusive price increases that generate greater profit for all competitors.

This market shrink-profit growth spiral has been observed in industries where health concerns, coupled with the addictive properties of products, allow for a predictable but gradual decline. Take manufacturers of cigarettes and sugary, carbonated beverages, for example. While the sale of cigarettes declined gradually and predictably starting around 1982, the profits of cigarette manufacturers grew significantly through 1990. Also, while consumption of carbonated beverages declined 16 percent between 1998 and 2011, beverage companies increased profits by raising prices on consumers who remained devoted to the category.

Pazgal and his co-authors also show that in markets that grow gradually, late-entering consumers are less committed to the category. So a downward price spiral may ensue as firms compete for their wallets. In the end, prices plummet (think HDTVs) and gains from growth in demand are reduced.

While there is a limit to the number of customers who can leave (or enter) a market while firms continue to enhance (or shrink) profits, findings from the research are clear: Sometimes competing in a shrinking market can pay off, and growing markets are not always the best indicator of future profits.

So when your customers leave, think twice before you chase them with price incentives. Declining markets are not always unattractive: New competitors are unlikely to enter and remaining, committed consumers are willing to accept higher prices. When certain customers go away, profits can go up.

Amit Pagzal is the Friedkin Chair in Management and Professor of Marketing and Operations Management at the Jones Graduate Business School at Rice University.

To learn more, please see: Pazgal, A., Soberman, D., & Thomadsen, R. (2013). Profit-increasing consumer exit. Marketing Science, 32(6), 998-1008.

Based on research by Wagner Kamakura and Jose A. Mazzon

• A new strategic marketing method uniquely measures socioeconomic status across all income and social class strata.
• It is highly practical, especially for emerging markets.
• Applying this method to data about consumers in Brazil, it pointed to a sizable growth opportunity targeting lower-middle strata consumers, not wealthy ones.

Global marketers often assume that they can’t make much money from the masses in emerging markets, which leads them to focus on affluent consumers who they think offer better returns. While this might be the right strategy for categories where spending is concentrated among the wealthy minority — think travel or recreation — it’s not such a good idea for products sold by packaged goods manufacturers. After all, most any consumer — from the masses to the elite – would need to buy products such as food and cleaning supplies. So why do so many think that it’s better to enter a market “fighting from the high ground” by focusing almost exclusively on affluent consumers?

First off, in order to take advantage of an opportunity you have to see the opportunity, and it’s much easier for the average marketer to see the money associated with affluent consumers. Also, segmentation methods commonly used to assess consumers in emerging markets tend to yield more insight about those in the higher social strata than the masses. And despite all the talk of an emerging middle class in the BRICS nations (Brazil, Russia, India, China, South Africa), marketing researchers have only a vague idea of what defines this class and the consumption habits/priorities they exhibit.

Wagner Kamakura, Professor of Marketing at Rice Business, and his co-author, José A. Mazzon of the University of Sâo Paulo, set out to address this conundrum. In a study, they developed a new socioeconomic stratification method that they tested in Brazil – after the nation had undergone dramatic socioeconomic shifts triggered by new social programs implemented in 2001. They used census and expenditure data from almost 49,000 households in 2003 and 56,000 households in 2009 that was collected by a government-sponsored agency in Brazil.

What sets their method apart from all others? For starters, it’s well grounded in social and economic theory. It relies on the concepts of social class and socioeconomic status (SES) to recalibrate the stratification process used by researchers. Traditional stratification approaches focus on current income as an indicator of status, but rarely is current income alone the best indicator of one’s status. Think about it this way: Educational attainment is a key driver of your occupational status that, ultimately, affects your income. So a robust measure of your SES should capture a complex set of measures that indicates your status. In this spirit, Kamakura and his co-author define SES based on indicators of not only permanent income, or wealth (e.g. number of consumer durables owned, employment of household help), but also social class (e.g. educational attainment, occupation of the head of household, access to public services).

The new method also reigns supreme in terms of practicality. For example, marketers like to deal with segments of consumers, or else why would they go through the trouble of mapping households on multiple dimensions and often force-fitting a holistic interpretation in order to develop segments? The new method short-circuits this cumbersome process by classifying consumers directly into so-called “latent classes.” These distinct latent classes, or segments, occur naturally (i.e. not artificially created via researcher interpretation) and are ordered hierarchically based on the SES indicators. To boot, this method can accommodate data from multiple sources and yields reliable results, even when there’s missing data. This is welcome news even for the most experienced marketing researchers. The robustness and practicality of Kamakura and Mazzon's proposed socioeconomic stratification system was very appealing to Brazilian marketers; it was scheduled for adoption by the marketing research and media industries in that country by the end of 2013.

Findings from the study of Brazil illustrate how the new stratification method, as compared to traditional methods, provides marketers valuable consume insights. First, the resulting stratification scheme yielded greater balance and insight across the strata (rather than insight only about the higher strata). It revealed a clear shift of consumers toward higher strata from 2003 to 2009, when over 20 million Brazilians climbed out of poverty. Second, differences in consumption across strata are due mostly to differences in consumption priorities rather than budget size. So if lower strata consumers increase their budget, they would spend a greater percentage of that budget on products/services they prioritize (e.g. cleaning products), rather than products/services that are prioritized by the wealthy (e.g. housing). Finally, the concentration of spending on products often sold by packaged goods manufacturers (e.g. dairy, bakery, beverages) varies little across strata. Collectively, these findings point to a large and growing market for products targeted toward consumers in the middle/lower strata of emerging markets such as Brazil. Even if it means reconfiguring current offerings to produce just “good enough” products/services, the size of opportunity with an emerging middle class could be worth it.

So while it’s much easier to follow the money associated with affluent consumers, consider being a savvy marketer who is willing to explore the advantages of the new SES-based stratification method. Sharper socioeconomic stratification methods that are practical and flexible can be useful in revealing untapped marketing opportunities, over time, in emerging markets.

Wagner Kamakura is the Jesse H. Jones Professor of Marketing at the Jones Graduate School of Business at Rice University.

To learn more, please see: Kamakura, W. A., & Mazzon, J. A. (2013). Socioeconomic status and consumption in an emerging economy. International Journal of Research in Marketing, 30(1), 4-18.

Based on research by Sharad Borle, Utpal Dholakia, René Algesheimer and Siddharth S. Singh

• Simply mass emailing invitations to customers boosts community participation, making it an effective marketing strategy.
• Customers who act relationally in a community tend to be pre-disposed to such behaviors rather than motivated by participation.
• Though participation actually decreases some types of relational behaviors toward the firm, it has significant educational value for customers.

A customer community can be a virtual gold mine for some firms, creating substantial marketing value. This is why many firms are spending an increasing share of their marketing budgets on implementing customer community programs. However, the virtual goldmine could turn into a virtual ghost-town if customers don’t participate. So while many believe that customer communities create value for firms, the value creation process is unclear. Does participation in a community actually cause customers to exhibit more value-creating relational behaviors toward a sponsoring firm? And even if that’s true, is there anything specific that firms can do to increase customer participation?

Yes, according to findings from a study published by Rice Business faculty members Sharad Borle, associate professor of marketing, and Utpal Dholakia, professor of management, as well as co-authors, René Algesheimer and Siddharth S. Singh. What’s the secret? Send them an e-vite — an email invitation to join the community.

Using email invites to jumpstart customer participation in a community is fairly easy, but leveraging customer participation to increase value-creating relational behaviors toward the sponsoring firm, not so much. Contrary to what managers might think, customer participation actually decreases some types of relational behaviors toward the firm.

Borle and Dholakia, along with their co-authors, studied almost 14,000 eBay customers who list, bid and pay for products. While as an auction site eBay earns revenue from these activities, the firm also hosts customer communities comprised of buyers and sellers who chat real-time or via discussion boards. Consistent with a sociological definition of community, these online gatherings at eBay are social organizations where customers’ interactions around transactions are often mixed with personal chat, communication of war stories or social support.

During the year-long study, each customer had successfully completed at least one eBay transaction — won an auction or completed a sale — within three months prior to the research team’s experimental manipulation. But none had participated in an eBay community. Roughly half were randomly invited to participate in an eBay community, via email invitation, and the remaining customers were not invited. The data contained information on customers for 16 months prior to the release of the email invitation, and customers were observed for one year after the email invitations. Bidding behaviors — the number of bids placed per month, the total amount spent per month — and selling behaviors — the number of items listed per month and the total revenue earned per month — were tracked for each customer, and various demographic and marketing-related customer variables were recorded.

While an initial, cursory analysis indicated that participation was correlated positively with all four bidding and selling behaviors, a second, more detailed analysis revealed otherwise. This second analysis explicitly accounted for the fact that customers might self-select into participation, which could bias the results of the analysis, and was comprised of two empirical models. The so-called “participation model” showed that email invitations, along with a couple of reminders, worked. Customers who were invited to participate were associated with a 23 percent higher probability of participation than those who were not invited. The analysis also revealed that firms should pay attention to variables that could profile target customers, because certain variables could be associated with a higher probability of participation.

The so-called “outcome model” revealed an unexpected truth: that customer participation had a negative effect on a selling behavior outcome (number of listings) and a buying behavior outcome (amount spent). Specifically, a 10 percent increase in the propensity to participate, above the median value, corresponded to four fewer listings per month and a spending decrease of about .58 Euros per month. Scaled across eBay’s vast customer base, the negative impact is substantial. So in the end, it seems that customers who act relationally in a community tend to be pre-disposed toward such behaviors rather than motivated to do so by participation.

The researchers think that lower spending results from customers’ increased exposure to community-based war stories about the perils of overspending, and that revenue earned was not impacted, despite fewer listings, due to the educational value of the community. In short, customers learn, over time, how to become more efficient sellers. Ultimately, educational value might convert to long-term value for eBay in the form of customers’ positive word-of-mouth, as well as growth in customers/community members. However, this study focused squarely on the impact of participation on primary value-creating activities — namely the buying and selling behaviors of eBay community members.

When all is said and done, if you want to boost participation in a customer community, don’t just build it. Invite them to come. But be sure to temper your expectations regarding how participation will create immediate value for your firm.

Sharad Borle is an associate marketing professor at the Jones Graduate School of Business at Rice University. 

Utpal Dholakia is the George R. Brown Professor of Marketing at the Jones Graduate School of Business at Rice University.

To learn more, please see: Algesheimer, R., Borle, S., Dholakia, U. M., & Singh, S. S. (2010). The impact of customer community participation on customer behaviors: an empirical investigation. Marketing Science, 29(4), 756-769.

Based on research by Wagner Kamakura and Rex Yuxing Du

• During recessions, expenditures on luxury items could be influenced not only by budgets, but also by what others are visibly consuming.
• Spending decreases for visibly consumed, non-essential products because consumers don’t have to spend as much to maintain social status. Everyone has cut spending.
• Managers should understand how and why consumers buy their products and services, especially during economic downturns.

During the Great Recession of 2008, some people lost their jobs or suffered pay cuts, while others proactively trimmed consumption in an effort to boost savings or reduce debt. As the economy expanded in the years after, we observed a persistent and rising gap between the financial “haves and have nots.” Regardless of why budgets differ among consumers, economists rely on an age-old relationship between consumption budgets and spending patterns: Those with small budgets spend the greater share of their money on essentials, such as groceries, while those with deeper pockets tend to spend a greater share of their money on non-essentials, such as jewelry and food away from home.

Economists rely on the “budget effect” to explain the relationship between macroeconomic conditions and shifts in consumer spending for both essentials (products or services that fulfill core needs) and non-essentials (products or services that fulfill “wants” rather than needs). They believe that macroeconomic cycles only change how much we spend on essentials versus non-essentials, not how much utility — a.k.a. enjoyment or usefulness — we get from either type of product.

The “budget effect” certainly makes sense. After all, during the last downturn, when many consumers cut back on their daily “Venti Upside Down Nonfat Caramel Macchiato” at Starbucks, CEO Howard Schultz claims that most didn’t stop patronizing Starbucks altogether. Rather, consumers made fewer visits but continued to experience pre-recession levels of gratification from the Starbucks products and experience. In the same vein, traditional economists argue that during a recession, we spend less on non-essentials only because we have less and not because we find the products less fulfilling.

However, Wagner Kamakura, professor of marketing at Rice Business, and his co-author Rex Yuxing Du, a professor of marketing at Bauer College of Business, knows better than to focus only on the budget effect when attempting to explain how economic cycles affect personal spending. Findings published in an an article he co-authored suggest that the impact of a recession (or expansion) on spending is not simply a matter of capturing the budget effect but also the “positional effect."

In assessing the potential for a positional effect, managers should focus not just on whether a product or service is essential or non-essential, but also on the meaning and social context that often underlies and surrounds consumption behavior. For example, consumption of positional goods or services often is used to signal a consumer’s socio-cultural position to others. To clarify, positional goods are those for which a consumer’s utility and spending level depends on their belief about how much others are spending on them (e.g. jewelry, houses, cars). They often are consumed publicly and, thus, have higher socio-cultural visibility than non-positional goods that are consumed privately (e.g. insurance, safety devices).

The logic behind the positional effect is straightforward when viewed through the lens of an economic downturn. During a recession, signaling social standing via expenditures is costly for everyone. So as total consumption falls across the economy, consumers tend to reduce spending on positional goods and services simply because it takes a lot less spending to either keep up with “The Joneses” or to remain “The Joneses.” Essentially, recession dampens the motivation for “competitive consumption.”

Kamakura and his co-author found strong support for their central hypothesis: In a recession, (a) consumers are likely to spend a smaller share of their budget on visibly consumed non-essentials (positional items) and are likely to spend a greater share of their budget on privately consumed essentials (non-positional items); and (b) the reverse takes place during an economic expansion. They used data made available by the Bureau of Labor Statistics and the National Bureau of Economic Research to assess expenditures for more than 66,000 households, spanning a period including three recessions (1982-2003). Support for their hypothesis was found across a broad assortment of products and services that were classified as either essential or non-essential as well as either positional (i.e. higher-visibility or public consumption) or non-positional (i.e. lower-visibility or private consumption).

Managers should understand how and why consumers buy their products and services, especially when a recession looms. While keeping up with The Joneses would be less costly for consumers during a downturn, firms could suffer the “double whammy” of positional and budget effects for visibly consumed non-essentials (think high-end luxury retailers). However, high-priced items aren’t the only ones for which spending could plummet should the economy take a dip. The management team at Starbucks also should be concerned about a drop in spending for many of their visibly-consumed, specialty drinks. The decline might be steeper than they think.

Wagner Kamakura is the Jesse H. Jones Professor of Marketing at the Jones Graduate School of Business at Rice University.

To learn more, please see: Kamakura, W. A. & Du, R. Y. (2012). How economic contractions and expansions affect expenditure patterns. Journal of Consumer Research, 39(2), 229-247.