Low-income households are the most in need of savings strategies when buying goods and services, but liquidity constraints prevent them from taking advantage of intertemporal money-saving strategies. So, they end up paying more for essentials than other income groups do. Policymakers can help them by ensuring greater liquidity throughout the month, while marketers can take their unique promotion response patterns into account when deciding on prices and targeting strategies.
When making everyday purchases, households have several savings strategies available to
them. They can buy cheaper brands or opt for intertemporal savings strategies like bulk buying or frequent buying or purchasing ahead of requirement to benefit from a sale. However, low-income families—who would benefit the most from such strategies—often cannot take advantage of intertemporal strategies and focus only on buying cheaper brands. To address this contradiction and iniquity, a study investigates the question: How can low-income households better use intertemporal savings opportunities?
The study found that low-income households are unable to take advantage of intertemporal
savings strategies because of liquidity constraints over and above other potential constraints like storage limitations, limited access to relevant channels, myopia or financial illiteracy. They utilise these strategies less than middle and higher-income households because such strategies require higher upfront payments. Therefore, they end up paying a higher price per unit than middle- and higher-income households. For example, they can’t avail of options like buying a 6 kg pack of detergent instead of a 2 kg pack to get a lower price per kg because the upfront payment for 6 kgs is higher than that for 2 kgs.
Low-income households also have less access to credit, along with lesser earnings. Because
of this, they are dependent on salaries or other direct payments to make purchases. The more time that passes from receiving the income, the lower their liquidity and spending ability goes down. Typically, their liquidity is highest near the beginning of the month and lowest towards the end of the month. As a result, even when they can take advantage of intertemporal savings strategies, they can do so only near the beginning of the month. For example, if there is a Buy One Get One sale on shampoos in the third week of a month, they can’t benefit from it because of a lack of liquidity.
Low-income households often have a complicated relationship with consumption. For instance, television viewing can skew their consumption pattern and hurt them. This post tells you more.
The study concludes that liquidity constraints prevent low-income families from making the
best of money-saving opportunities, leading to them paying more for even essential goods and services. They use strategies like buying in bulk and accelerating purchase incidence when they have more liquidity at the beginning of the month. At other times, they buy cheaper brands to maximise their savings. However, the loss from not being able to utilise intertemporal strategies offsets their savings from buying cheaper brands. Therefore, if their liquidity situation could be modified to increase liquidity throughout the month, they would be more willing and able to utilise intertemporal savings strategies.
The study has relevant findings for policymakers looking to reduce the poverty penalty,
which refers to the phenomenon of low-income groups paying more than middle and high-income groups for essentials, borrowing and other goods and services. Policymakers can use the schemes that support low-income groups to ensure that income spreads out throughout the month so that they are able to save in the shopping environment by utilising intertemporal money-saving strategies. They can also improve financial literacy so that these households will know when and how to utilise liquidity when they have it.
The study also has important insights for marketers in setting prices and targeting
promotions. It is essential for them to account for households’ heterogeneous responses to different types of offers to maximise buyer response to them. They can separately account for spending patterns of low-income households and target them through more appropriate offers. For example, they respond to intertemporal schemes only during the beginning of the month, and they respond less to schemes that require intertemporal substitution (e.g., Buy 3 get 1 free). Marketers can consider such factors when planning for promotions.
When designing and targeting promotions, the language used can also make a difference. Here’s how promotion keywords like Sale and Clearance impact buyers and public policy.
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