How Rational Choice Theory Affect Marketing Budgets
You calculate the pros and cons every time you choose, weighing your choice against their alignment with your personal preferences. This practice is the rational choice theory. In economics, the rational choice theory is used to provide choices with the expectations that consumers will opt for what benefits them or gives them the most satisfaction.
Marketers can use rational choice theory to target specific groups assuming that these consumers will act rationally. Marketing teams use a metric to gauge consumer behaviour, so let’s determine how rational choice theory affects marketing budgets.
Rational Choice Theory in Retail Economics
In rational theory, the individual makes choices using self-interest, choosing what will bring them the most benefit. You weigh your options or choices and then make decisions on what will best serve you. Personal preferences come into play when deciding on what suits or profits you.
For example, you may choose to start running in your neighbourhood to become healthier, preferring its solitude and outside air. Another person may opt instead to join a gym or a yoga class for social cohesiveness. Both of you will make your choice depending on what you expect to get out of your choice. Rational choice theory expresses that there is a reasonable justification for the choices that individuals make.
If your marketing budget is based on rational choice theory, your business often targets your consumers’ self-interest. Marketers make information available, usually through ads, to assist consumers or rational actors in making rational calculations. A rational actor or consumer is the basis of this theory, and these are buyers who are consistently minimising their loss by taking advantage of the information marketers have provided.
The Economic Dominance of the Rational Choice Theory in Markets
Economic assumptions are based on rational choice theory, which is often associated with rationality, the ‘invisible hand,’ and rational actors. The ‘invisible hand’ that moves markets was proposed by Adam Smith, a philosopher from the 1700s. Smith is the father of the rational choice theory, which, after dominating economics, crept into sciences like sociology, philosophy, and psychology.
In 1776, Adam Smith wrote an essay titled ‘An Inquiry into the Nature and Causes of the Wealth of Nations.’ In this essay, Smith stated that human tendencies naturally bore on self-interest, a phenomenon he called the ‘invisible hand.’ According to the philosopher, this unseen force is what drove free markets to prosperity.
For any economic assumption to fit rational choice theory criteria, the following factors have to be satisfactory;
- Actions are rational and as a result of reward or cost calculations.
- The reward must outweigh the cost.
- Actors will cease interaction or relationship if cost undermines the value of the reward.
- Rewards get optimised by individuals with the use of available resources.
Features of Rational Choice Theory in Marketing Budget-Making
Individual consumers become treated as the primary decision-makers or actors, according to rational choice theorists. The demographic an individual consumer represents is then considered a single unit when making budget proposals based on the theory’s behavioural economic applications.
Once your consumers or rational actors are identified, ascertaining their desires determines the most likely outcome. For instance, for a consumer who purchases groceries, marketers use rational choice theory to figure out what that person’s spending habits will be. Your assumptions are based on the sustenance, wants, and needs of that particular rational actor and the entire target community.
As a seller, you can adjust the availability of products or services based on this model through pricing or volume. The rational choice theory gets used by your business to predict your customer’s behaviour when the demographic derivation of an actor or community becomes known.
Since adverting can influence decisions or override rational spending, your marketing team must use economic decision-making variables to adjust their budgets accordingly. Critics of the rational choice theory believe it’s not the individual who’s the decision-maker but society’s classes.
Benefits of Rational Choice Theory in Economic Decision Making
When using the rational choice approach in decision making, such as in marketing budgetary allocations, your company sees actor preferences as utility functions with real value. Making future predictions or aligning your business’s objectives and budget to rational choice models will rely on consumer preferences.
The rational choice approach is general compared with other choice theories. You can use it to analyse personal choices on traditional consumption and savings economic matters. Your business entity can use rational choice in their marketing budget-making and in investment, output, entry, hiring, exit, etc. with various degrees of success.
Criticism against Rational Choice Theory in Marketing Budget Predictions
A potential point of criticism in rational choice theory economic models is the absence of accounting for non-self-serving behaviour like philanthropy. A business’s marketing budget doesn’t consider values, ethics, and social norms that may influence behaviour and decisions.
Critics argue that rational choice theory models don’t account for fixed learning rule decision-makers. These individuals do things the way they first learned doing them, without self-interest or with higher costs.
Such arguments state that individuals or communities may follow social-religious norms even when there are no benefits for this adherence. An actor’s emotional state, environmental factors, or social context issues may result in consumer decisions that won’t align with a budgetary rational choice marketing model’s theoretical assumptions.
In general, rational choice theory models have a narrow interpretation of rationality. This has led to the neglect of essential factors such as the enchantment of consumption patterns, financial transactions, and religious faith.
Rational choice theory can become utilised alongside other economic approaches to navigate your marketing budgets better. There are also psycho-social determinants such as social leanings and understanding consumers to fully maximise the effectiveness of rational choice models.
To keep markets rational function, your marketing teams mustn’t depend too much on individual rational behaviour. Ultimately, over-usage may lead to negative declining demand curves.