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. Your buying power relates to your ability to purchase goods and services. For example, if you increase your income, you increase your buying power. If you decrease the cost of goods, such as using coupons, you increase your purchasing power, a different, but related concept.
This list helps companies understand a consumer buying power and a consumer purchasing power definition, along with insights into where a marketplace might be heading and what consumers are actually spending money on versus what a company believes consumers want to purchase.
Read More: What Is Consumer Discretionary Income?
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. Some consumer spending is discretionary, meaning the person doesn't need to spend the money, such as on a trip to the movies or a new pair of shoes.
Other spending is required, or fixed, such as rent, utilities, phone bills, etc. Companies that make discretionary products, therefore, are more interested in a consumer's discretionary buying power.
Read More: Three Strengths of the Consumer Price Index & Three Weaknesses of the Consumer Price Index
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, explains. 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.
Read More: The Average Cost of Food in a Household Budget
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.
Some businesses look at consumer buying power in their target market demographic, which might be a certain age group, race or sex.
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.
For example, if you have $300 per month to spend on groceries, that's your buying power. If you wait to buy pasta when it's 50 cents per box instead of $1.00 per box, you increase your purchasing power, while your buying power remains at $300.
