The microeconomic trends in terms of consumer income are also important issues for marketers. Having a product that meets the needs of consumers may be of little value if they are unable to purchase it. A consumer’s ability to buy is related to income, which consists of gross, disposable, and discretionary components.
Gross Income The total amount of money made in one year by a person, household, or family unit is referred to as gross income (or “money income” at the Census Bureau). While the typical U.S. household earned only about $8,700 of income in 1970, it earned about $50,054 in 2011. When gross income is adjusted for inflation, however, income of that typical U.S. household was relatively stable. In fact, inflation-adjusted income has only varied between $45,146 and $54,489 since 1970. Approximately 54 percent of U.S. households have an annual income between $25,000 and $99,999.26 Are you from a typical household? Read the Marketing inSite box to learn how you can determine the median household income in your hometown.
Disposable Income The second income component, disposable income , is the money a consumer has left after paying taxes to use for necessities such as food, housing, clothing, and transportation. Thus, if taxes rise or fall faster than income, consumers are likely to have more or less disposable income. Similarly, dramatic changes in the prices of products can require spending adjustments. In recent years, for example, as the price of gasoline increased, consumers found themselves adjusting their spending in other categories. In addition, the decline in home prices has had a psychological impact on consumers, who tend to spend more when they feel their net worth is rising and postpone purchases when it declines. During a recessionary period, spending, debt, and use of credit all decline. The recent downturn has led many consumers to switch from premium brands to lower-priced brands.27
American FactFinder: Your Source for Economic Information
Marketers collect and use environmental information to better understand consumers. One way to begin an environmental scan is to compare economic and demographic data about a particular segment of the population to what is “typical” or “average” for the entire population. Do you think your hometown is typical? To find out, visit the American FactFinder at http://factfinder2.census.gov and use the “Community Facts” tool to obtain information about your hometown. Just type in the zip code of your hometown and FactFinder will give you population size, median age, and median income information from the U.S. Census. You can also click on links listed under American Community Survey for more detailed information. Use the tool to look up information about your state or the United States to make comparisons.
Discretionary Income The third component of income is discretionary income , the money that remains after paying for taxes and necessities. Discretionary income is used for luxury items such as a Cunard cruise. An obvious problem in defining discretionary versus disposable income is determining what is a luxury and what is a necessity.
The Department of Labor monitors consumer expenditures through its annual Consumer Expenditure Survey. In 2011, consumers spent about 13 percent of their income on food, 34 percent on housing, and 4 percent on clothes. While an additional 24 percent is often spent on transportation and health care, the remainder is generally viewed as discretionary. The percentage of income spent on food and housing typically declines as income increases, which can provide an increase in discretionary income. Discretionary expenditures also can be increased by reducing savings. The Bureau of Labor Statistics observed that during the 1990s and early 2000s the savings rate declined to zero. That trend was reversed in 2008 when the government issued stimulus checks designed to improve the economy and, instead of spending the money, consumers saved it. Recent data on consumer expenditures indicate that the savings rate is now approximately 3.7 percent.28
As consumers’ discretionary income increases, so does the opportunity to indulge in the luxurious leisure travel marketed by Cunard.