Why do we consume? From the economic point of view, this has a very simple answer – we consume goods and services to gain satisfaction. The satisfaction being talked about here is actually provided by the utility that every good and service possesses.
Utility is an economic term which was introduced by mathematician Daniel Bernoulli which refers to the total satisfaction received from consuming a good or service. The concept of utility in economics is studied through another relative concept known as marginal utility, which refers to the additional satisfaction a consumer gains by consuming one more unit of a good or service. We must bear in mind that marginal utility, unlike total utility tends to decrease as we consume more and more units of a commodity. This phenomenon is known as the law of diminishing marginal utility. This may be understood with the help of the following diagram.
Below we try to understand the relationship between consumer satisfaction and utility altogether with a special reference to the service sector.
Utility is an imaginary concept which according to some great thinkers like Adam Smith and Professor Hicks is not at all reliable. However even today, most of the companies measure the rate of growth of their operations in terms of utility. Utility seems to be an extremely easy-to-understand concept but when it is mixed up with consumer satisfaction, it gets highly complicated and hard to understand.
We already know that a consumer consumes a particular product because that product possesses utility, the want-satisfying power in it and marginal utility is the additional utility that the consumption of that good provides the consumer with. Let us have a look at a simple example regarding the same.
Suppose there is a piece of cake which is to be consumed by some consumer. On consuming one piece of it, he receives 100 utils of utility. On consuming another, he receives 170 utils of utility and it goes on and on as 190, 180, 140. Now a layman may think that the consumer stops his consumption when he gets only 140 utils of utility but it isn’t so. All that depends upon the marginal utility of the product which, if negative, makes the consumer stop the consumption of that product. Hence, the consumer must stop his consumption at 3 units i.e. 190 utils of utility because if he goes any further, his level of satisfaction will come down.
The above example shows how an economist examines and studies such a situation with respect to utility and consumer satisfaction. But we must also bear in mind that a producer or a consumer may see the same situation through a different perspective.
A consumer may not get to know when he should stop his consumption of the cake as utility cannot be measured in numerical terms. So, he may go on and on consuming the cake even after its marginal utility has hit negative, for some time which is a loss to him because his satisfaction is not getting maximized in this case. This is one of the biggest limitations of the utility system too, that it cannot be measured in terms of numbers.
Similarly, from the point of view of a producer the situation may seem to be entirely different. An entrepreneur, being a highly qualified professional knows everything he needs to know about market economics which is why he usually uses utility to the most of its benefit and this is how he does it.
As the law of diminishing marginal utility suggests, as the consumer consumes a product its utility shoots down and eventually, the consumer stops its consumption. But a good entrepreneur goes through this economic phenomenon beforehand and thus, takes countermeasures. He doesn’t want to lose a potential customer due to this phenomenon and so what he does is offer less at first. Side by side, he keeps on using his amazing marketing techniques and tricks to keep the customer entangled in his marketing web so that he consumes his product, no matter it offers less amount of satisfaction. Then gradually when the entrepreneur feels that he has marketed his product enough and is ready to enter the next stage, he raises the satisfaction providing level of his product so that the consumer consumes more and more of it.
Basically, he just plays with the mind of the consumer and keeps him entangled. If he satisfies him too fast by directly providing high utility products or services, he may lose out on him. This process acts as a never ending one for the entrepreneur and the one who does it all perfectly, grips the market and establishes a name for his company. This is one of the very few practical economic reasons as to why a producer at first starts with a small scale industry and not a large one.
This phenomenon of utility was well understood by the entrepreneurs behind brands such as UrbanClap, Uber India and FoodPanda which has today made them the fastest growing startups in our country. For example, Uber started with a low market capitalization and offered rides only in some select cities of the country which were nothing in front of the service that Uber provides today. Eventually people started giving an overwhelming response to the foreign based taxi service provider which made it increase the perks for consumers and side by side, its network as well.
So this is how utility, an imaginary cardinal concept plays such a vital role when it comes to consumer satisfaction, marketing and of course, economic analysis.