Explaining the Law Of Diminishing Marginal Utility

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Closeup of roasted popcorns filled in buckets at cinema

The Law of Diminishing Marginal Utility (and Too Much of a Good Thing)

We’ve all heard that you can have too much of a good thing, but that principle might be most evident at the movie theater. As you walk toward the concession stand, you’re usually confronted with choices for popcorn and drink sizes. Sure, you really only have the appetite for a small popcorn, but you’re upsold by a clever concession worker into a large. As you settle into your seat, you start eating your buttery popcorn. It’s love at first bite as you thoroughly enjoy that first handful of kernels during the previews. You probably find, however, that each successive bite is just a little less euphoric than the last, and by the time the movie starts, you’re ready to toss that half-full bucket of popcorn in the trash. Had you purchased a small, you would have finished every piece.

There are a couple of economic theories at work here, the most prominent of which is the law of diminishing utility. In layman’s terms, the law of diminishing utility states that as a person increases consumption of an item or product, he or she experiences a decline in the utility or satisfaction derived from that product. In short, it means you definitely can have too much of a good thing.

The law of diminishing marginal utility is often used as a marketing strategy, especially when paired with other well-known economic theories. Marketing campaigns must walk the precarious tightrope of offering products when customers want them most, but holding back just enough to keep marginal utility high in order to keep marketing ROI robust.

The next time you’re goaded into buying an extra-large popcorn at the movie theater, consider the following forces at play and you might just find the strength to downgrade to a small.

  • Utility refers to satisfaction. In the case of the law of diminishing marginal utility, utility can be referred to as satisfaction or happiness. A person derives utility from any product that gives a sense of satisfaction.
  • Marginal utility can reach zero. Even products that start with a high degree of marginal utility can soon reach zero (and even negative value) if too much consumption takes place. Consider eating pizza: The first slice is great, but each subsequent slice is less satisfying. And eating too much? That can make you feel sick, so utility becomes negative.
  • Utility is entirely subjective and impossible to quantify. Marketers the world over would pay enormous sums for someone to quantify marginal utility, but it’s impossible. That’s because utility is a subjective principle that varies from person to person. The amount of utility a well-hydrated person derives from a cold glass of water will be vastly different than the satisfaction of someone who has been lost in the desert. Satisfaction always hinges on the viewpoint and circumstances of the individual in the moment he or she consumes a product.
  • The law of diminishing marginal utility affects purchasing decisions. Why did you buy that extra-large popcorn when you only wanted a small? Movie theaters know that in the moment of a purchasing decision–and particularly when you smell and see the popcorn–it’s easy to persuade you to purchase more, especially when the price is right. The average moviegoer wouldn’t pay double for twice the amount of popcorn, so twice the amount for just a dollar more seems like a steal.
  • Marketers use the law of diminishing marginal utility to design and price products. Knowing that customers often want the most in the moment of purchase (and that their satisfaction will wane over time) affects product features and pricing. Marketers balance what customers will pay for the features they think they want, and leverage those factors against buying behaviors. Either customers will pay more for products they’ll eventually tire of and waste, or they pay less for products that will run out and require future purchases.

The law of diminishing marginal utility might seem like a mouthful, but it’s a powerful force in purchasing decisions. Whether you’re deciding on a treat for the movies or planning marketing strategy, knowing that you can have too much of a good thing could affect the amount you purchase–all dictating a sophisticated dance between quality and quantity.

 

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