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Mental Accounting And Its Impact On Consumer Add in library

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Questions:

1. What is mental accounting? How does mental accounting impact consumer decision making?

2. How might a company take advantage of consumers’ mental accounting? Give examples.

3. As a marketer, how might you frame certain decisions to benefit from the disparities that arise in one’s cognitive accounting?

4. As a consumer, how would you avoid the pitfalls posed by the inequalities of one’s cognitive accounting?
 
 

Answers:

Introduction

The mental calculation which the consumer does by comparing not just the price but the utility and the source of the money before making any purchase can be called as mental accounting. (Grinblatt, 2001).

1. What is mental accounting? How does mental accounting impact consumer decision making?

Mental accounting takes into account all those factors which a customer takes into account while buying any product. The buying pattern of consumers greatly depends on the formula of mental accounting. The consumer makes a mental note comparing the source of the money and the satisfaction which shall be received by spending that money on the product.  For instance a person might have saved a certain amount during summers. But he or she might spend a huge amount from that saved chunk on winter sale for the reason that he assumes that the same clothes will sell at a price much higher during winters.  (Morck, 2000)
 

2. How might a company take advantage of consumers’ mental accounting? Give examples.

 
The companies are very smart. They are spending crores on just to understand the psyche of the consumer before buying any product. Take for instance the popular coffee chains. The rate of a café late in the city might be $50 whereas the same coffee chain when opening its branch on some hill station will have the same café late offered at $ 90 for the reason that the tourists will not notice the money but the value of a hot sizzling cup of coffee in chilly weather. (Stein, 2003
 

3. As a marketer, how might you frame certain decisions to benefit from the disparities that arise in one’s cognitive accounting? 

An intelligent marketing technique that maximizes its profits by harping on the cognitive accounting of all individuals is by maintaining an entire range of sizes of products or garments. A 50 ml bottle of shampoo of some popular brand for $20 might seem unnecessary but at the same time a smaller bottle of the same brand available at a lesser price will be quickly picked up by the customer. (Stein, 2003)

4. As a consumer, how would you avoid the pitfalls posed by the inequalities of one’s cognitive accounting?

The best way to avoid the pit falls laid out by the smart marketing of the companies is to understand the value which the product will add to our lives, if the product does not seem to add any value then the buying is not necessary. (Morck, 2000)

Conclusion

The casinos basically thrive on the concept of mental accounting. A person gets huge returns and the smart employees of casino keep motivating people to invest more money and to take back huge returns home. (Stein, 2003)But in most of the cases what happens eventually is that people get so obsessed with winning that ‘uncertain huge amount’ that they are unable to concentrate on the ‘certain amount’ which they have in hand. (Grinblatt, 2001)However if they were to part with that kind of money from their salary, they would obviously never take such a decision. 

 

References

Grinblatt, M. (2001) “The disposition effect and momentum”. University of California, Los Angeles.

Stein, J. (2003), “Differences of opinion, short-sale constraints and market crashes”. Review of Financial Studies 16:487−525

Stulz, R.  (1996), “Timing, investment opportunities, managerial discretion, and the security issue decision”. Journal of Financial Economics 42:159−185

Morck, R. (2000) “Demand curves for stocks do slope down: new evidence from an index weights adjustment”. Journal of Finance 55:893−912.

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