Beyond the Budget Line: How Consumers Hierarchically Map Their Spending, And What It Means for Marketing
We all try to budget. Whether formal or informal, consumers set restrictions on spending, treating money as nonfungible, earmarked for specific functions like ‘gas’ or ‘food’. But how do we truly organize those spending buckets in our minds? The working paper, “Consumers’ Mental Representation of Expenditures: Implications for Spending and Savings Decisions,” by Lin Fei, Daniel M. Bartels, and Walter Zhang, offers a profound answer that moves beyond traditional mental accounting theory: we represent expenditures in a hierarchical taxonomy, much like how we organize concepts of the natural world.
If you’ve read the paper, you know this is a game-changer for understanding consumer financial decision-making. Instead of viewing budgeting categories as a single flat list (e.g., just “food” or “entertainment”), the research posits that we categorize spending into multiple, nested levels, where lower levels are specific and higher levels are general.
The Core Idea: Unpacking the Hierarchy
The researchers tested this hypothesis across seven studies, supported by extensive norming and pilots, using a method called the successive pile-sort. This approach allowed them to recover people’s inherent mental organization of common expenditures (like rent, dining out, or movie tickets).
A key discovery was the presence of consensus in these mental representations—people largely agree on the relative taxonomic distance between items. For instance, people instinctively agree that “shampoo” and “sunscreen” are grouped together at a more specific level than “shampoo” and “movie tickets”. Furthermore, these personal taxonomies are relatively stable over time, suggesting this categorization method is a natural way people organize financial concepts.
If you visualize this, it looks like a tree structure. For example, the expenditure “Cereal” is specifically “Breakfast Food,” which in turn is nested within the broader category of “Food,” all falling under “Things bought at a grocery store” (as depicted in Figure 1 of the paper).
Key Takeaway: Taxonomic Distance Predicts Spending Adjustments
The most impactful finding reveals that this hierarchical structure directly predicts consumer behavior, especially when people deviate from their budget, when they overspend or underspend.
The principle is straightforward: When consumers deviate from their budget on an item, they spontaneously adjust spending more on items that are taxonomically closer than those that are further away.
- If you overspend on a new pair of shoes, you are more likely to cut back on spending for jeans (a taxonomically close item) than on bread (a farther item).
- The effect is nuanced, moving beyond the binary “within-category” versus “out-of-category” definitions previously used in budgeting literature. The degree of adjustment depends on the level at which the items are categorized together.
Crucially, this adjustment behavior is spontaneous; consumers do not need to be explicitly prompted with category labels to exhibit this pattern. The researchers confirmed this pattern across self-reported adjustments (Studies 2a-c), incentivized choices regarding promotion applications (Studies 3a-b), and, most compellingly, in real-world purchasing data.
Study 4: Real-World Grocery Purchases
In an analysis of approximately 6.5 million grocery shopping trips over twelve years, the paper demonstrated the power of taxonomic distance in predicting actual spending. When a focal item was on sale (underspending), consumers increased their spending on comparison items. However, this increase was significantly larger if the comparison item was taxonomically close to the focal item.
This finding is particularly insightful because the effect of taxonomic distance persists even when controlling for factors like whether products are substitutes or complements. For example, a sale on pizza impacts purchases of detergents, likely because they share the higher-level category of “grocery purchases,” even though they are neither direct substitutes nor complements. This continuous spectrum of influence is a significant departure from the traditional topical vs. comprehensive mental accounts framework.
Applications and Key Takeaways for Product Marketing Managers (PMMs)
The implications of the hierarchical representation of expenditures are vast, especially for PMMs and anyone involved in designing financial products, digital directories, or promotional strategies.
1. Designing Better Product Bundles and Promotions
Understanding taxonomic distance allows marketers to design offers that align with consumer psychological accounts, making promotions intrinsically more appealing.
- PMM Takeaway: When devising deals or promotions contingent on purchasing another good, consumers are more willing to claim the deal when the two items are taxonomically close. For example, a discounted bundle of toilet paper and detergents may be more effective than a bundle of detergents and instant coffee, based on how consumers naturally group these items.
- Leveraging Typicality: PMMs should note that when the focal item in a deal is typical of its category, the effect of taxonomic distance is more pronounced.
2. Enhancing Navigation and User Experience (UX)
The recovered taxonomy provides input for designing directories, menu structures, and even physical store layouts that resonate with how consumers naturally think about expenditures.
- PMM Takeaway: For e-commerce platforms or financial apps (categorizing expenses), organizing items into a hierarchy consistent with consumer representation improves the product search experience and reduces complexity. For example, consumers categorize food and daily products closer together than food and clothing.
3. Strategic Segmentation and Targeting
Although the research found consensus, variances still exist, particularly on items bordering two clusters (malleable items) or items far from any cluster (exceptional items).
- PMM Takeaway: Where consumer representations diverge, PMMs can characterize and target different consumer segments. For example, identifying consumers who naturally group “wine and cheese” differently from those who group “milk and cheese” allows for specialized marketing messaging and targeting.
This research provides a refined lens for viewing mental budgeting, replacing the rigid binary category approach with a dynamic, hierarchical map of spending relationships. For PMMs, leveraging this insight means building marketing strategies, promotions, and user experiences that speak directly to the consumer’s spontaneous, internal organization of their expenditures.