Table of Contents
Table of Contents

What Are the 4 Types of Economic Utility?

Economic utility can be defined as the total amount of satisfaction that someone experiences when they consume a particular product or service. It helps measure how much fulfillment someone requires in order to satisfy a particular need or want.

Companies strive to increase the utility or perceived value of their products and services to enhance customer satisfaction, increase sales, and drive earnings. The concept of economic utility falls under the area of study known as behavioral economics, which is designed to assist companies in operating a business and marketing the company to attract the maximum amount of customers and sales revenues.

There are four types of economic utility, which include form, time, place, and possession. Companies that can understand and recognize areas that are lacking in their marketing schemes can assess consumer purchase decisions and pinpoint the drivers behind those decisions, thus boosting their sales and profits.

Key Takeaways

  • Economic utility is the total amount of satisfaction experienced when a product or service is consumed.
  • Form utility is the value a consumer derives from products or services in a way they actually need.
  • When a company provides goods or services to consumers when they demand or need them, it is referred to as time utility.
  • Place utility involves making products or services available in locations that allow consumers to easily access them.
  • Possession utility is the use or perceived value a consumer gets from owning and being able to use a product or service in a timely manner.

Form Utility

Form utility refers to how much value a consumer receives from a product or service in a way that they actually need. Form utility is, therefore, the incorporation of customer needs and wants into the features and benefits of the products being offered by the company.

Companies invest time and money into product research to pinpoint exactly what products or services consumers desire. From there, company executives strategize on the development of the product with the goal of meeting or exceeding those needs to create form utility.

Form utility may include offering consumers lower prices, more convenience, or a wider selection of products. The goal of these efforts is to increase and maximize the perceived value of the products.

For instance, a cosmetics company may conduct focus groups and testing to identify holes in the market related to different skin types and skin tones. The company may decide to produce and market new offerings to cater to and complement the needs of a more racially diverse clientele. The company can increase its sales while adding value to these new consumers.

Utility doesn't necessarily have to be measured in numbers—just in perceived value. For instance, someone may choose to walk rather than take the bus or drive because they perceive the health benefits from the exercise to be greater than the speed and ease associated with being transported in a vehicle.

Time Utility

This type of utility occurs when a company provides goods and services when consumers demand or need them. Companies analyze how to create or maximize the time utility of their products and adjust their production process, logistical planning of manufacturing, and delivery. So when demand increases, the company should respond by producing and delivering more of the product to the market.

Creating time utility includes considering the hours and days of the week a company might choose to make its services available. For example, a store may open on weekends if customers typically shop for a certain product at that time. Time utility might also include 24-hour availability for a product or the company's customer service department through a phone number or website chat function.

Failure to factor time utility into the equation can lead to a drop in the customer base, which can result in a loss of revenue.

Economic utility can also be referred to as utility marketing. That's because product development and design require companies to persuade consumers to make purchases.

Place Utility

Place utility refers to making goods or services available in locations that allow consumers to easily access products and services.

While most people typically think of place utility as a physical or brick-and-mortar location, such as a retail store or shopping mall, the digital age helps broaden the definition of availability. For instance, companies can maximize place utility through their website. Those with effective search engine optimization strategies can improve their place utility.

Increasing convenience for customers can be a key element in attracting business. For example, a company that offers easy access to technical support gives consumers an added value compared to a similar company that does not offer a similar service.

Making a product available in a wide variety of stores and locations is considered an added value since it is more convenient. Apple (AAPL) sells iPhones and laptops through its retail stores, but also offers its products through other electronics retailers, including Best Buy (BBY).

Possession Utility

Possession utility is the amount of usefulness or perceived value a consumer derives from owning a specific product and being able to use it as soon as possible. The basic premise behind this utility is that consumers should be able to use a specific good or service as soon as they're able to purchase or obtain it.

For instance, someone who purchases the latest iPhone won't get much utility for the product if Apple has it on backorder and can't manufacture and ship it to the consumer in a timely fashion.

That's why it's important for companies to increase the ease of ownership, which boosts the product's possession utility or perceived value. Consider lenders who offer favorable financing terms toward owning a car, appliance, or home. They would likely create possession utility for these products, leading to an increase in sales and, therefore, revenue.

What Is an Example of Economic Utility?

The term economic utility refers to the total degree of satisfaction someone gets from using a product or service. It may be a car, house, food, clothing, financial services, or housekeeping. Companies that offer them can study the behaviors of their consumers and figure out what drives them to make purchases.

One example of an economic utility is the value customers receive from the latest iPhone model. Apple responds to the needs and wants of its consumers by updating and upgrading its phones on a regular basis.

What Are the Main Types of Economic Utility?

There are four main types of economic utility. The first is form utility, which means the amount of value someone receives from goods or services that they actually need.

Time utility has to do with the amount of time it takes for companies to respond to the needs and demands of their consumer bases.

The third utility has to do with place, which refers to a centralized location where consumers can easily access the products and services they need.

Possession utility is the final type of economic utility. It measures a product or service's perceived value based on a consumer's ability to obtain and use it as soon as the need or want arises.

How Can a Business Improve Utility for a Customer?

There are many steps that businesses can take in order to improve utility for their customers. This includes research and marketing activities, such as focus groups and testing. Companies can also consider increasing the speed with which they conduct their production process, resulting in the ease in bringing products and services to market. Companies can also make their products and services easily available (in retail locations and online) at lower costs.

The Bottom Line

People purchase goods and services to get some benefit or satisfaction. This allows them to fulfill a need or want when they consume it. This phenomenon is called economic utility. There are four basic principles that fall under this umbrella, including form utility, time utility, place utility, and possession utility. Companies can boost their sales and revenues by understanding and tailoring their marketing and production efforts to the way individuals purchase and consume their products.

Open a New Bank Account
The offers that appear in this table are from partnerships from which Investopedia receives compensation. This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace.
Open a New Bank Account
The offers that appear in this table are from partnerships from which Investopedia receives compensation. This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace.