It is high time companies start developing marketing strategies for the difficult times ahead.
The coronavirus outbreak is first and foremost a health tragedy, but it also has far-reaching economic consequences. Although governments and central banks have gone to great lengths to mitigate any adverse economic consequences, the IMF predicts that the global economy will contract sharply by 3 percent in 2020.
Just as you would rely on your grandmother for weathering a personal crisis, it may be helpful for companies to learn from previous experience of other companies that have faced similar circumstances.
In this article, we turn to the academic community for help. Since the 2000s, marketing academics have extensively studied the interrelationships between business cycles, marketing strategy, and firm and brand performance. The resulting body of literature can provide marketing managers with guidelines on how to weather tight economic times.
The aim of this article is to review this literature and give practical advice to managers confronted with this new and difficult economic reality. We will first discuss what we currently know about the impact of a recession on marketing performance outcomes and subsequently the effectiveness of different marketing activities, followed by key managerial recommendations for making better marketing decisions.
Marketing Performance Implications
Consumers may respond to an economic crisis in different ways. They can cut back the total quantity of products and services purchased, they may shift budgets across product categories, switch to cheaper brand (or store) alternatives within the product category, and/or postpone purchases.
We know, for example, that expenditures on consumer durables, international tourism, and health care are very sensitive to business cycles. We also know that consumers shift their budgets from positional (status-conveying) products to non-positional ones during recessions, and from discretionary (e.g., apparel, entertainment products) to more necessary products, even if their total budget remains the same. In addition, consumers may switch from expensive national brands to cheaper store brands within the same product category.
What is more, consumers may be quick to shift to store brands when a recession hits and they may be slow in switching back to national brands in the subsequent recovery period. This means that if one loses a customer during an economic downturn, that customer may be gone not just for the duration of the downturn but for much longer. Several factors contribute to this phenomenon. It may arise from the way consumers gain (slowly) and loose trust (quickly) but also because, immediately after a downturn, people will first have to pay off debts before they can start increasing their spending again.
A similar asymmetry can arise in the size of the peaks and troughs: troughs may be deeper than the peaks are tall. Consumers react much more strongly to losses than to comparable gains. This feature of our consumer psychology may cause households to reduce their expenditures significantly in a recession, while a similar gain in a subsequent economic upturn triggers a much more moderate change in spending.
Taken together, these findings imply that consumers may switch quickly and extensively to store brands in contractions, while they switch back slowly and less extensively to national brands afterwards. Now we know how consumers respond to difficult economic conditions, we will look at how firms do and should respond in the next section.
Marketing spending and marketing mix effectiveness
Firms often cut their marketing budgets in economically difficult times, while research shows that these periods provide great opportunities for strengthening your position by going against the tide. Still, many may not have the means to spend more in a recession.
For these firms, it is useful to know which marketing activities give the highest bang for their buck. So, what actions are most effective?
Advertising
Advertising spending reacts very strongly to changes in the business cycle. Several factors are responsible for this. First, advertising is often seen as a cost rather than an investment. Second, if fewer competitors engage in advertising, firms believe that lower advertising budgets may suffice because one can obtain the same share of voice with less money. Another reason may be the low commitment and flexibility in advertising contracts.
Is cutting your budget in a recession a wise decision, though?
The literature is not conclusive; some studies find lower long-term advertising sensitivity in a recession, which would call for reduced spending, whereas others find the exact opposite. These contradicting findings are hardly surprising if you look at what determines optimal advertising spending: 1) the unit contribution margin, 2) expected sales, and 3) the advertising elasticity.
Lower expected sales in a recession would thus justify a reduced budget, but in which direction the advertising elasticity changes is far from obvious. The elasticity can go up if competitors cut back on their advertising, making it easier to obtain the same share of voice with less money. In addition, the cost of advertising may drop due to a lower demand for advertising space, leading to a higher return on investment. Lastly, a brand’s value proposition may be particularly attractive in a downturn, leading to a higher elasticity compared to competitors.
Hence, the optimal spending in a recession depends on the extent to which an increase in a brand’s advertising elasticity can offset an expected decrease in demand.
Price
Lowering prices is smart if your customers are price sensitive, provided you can sustain the lower profit margin.
Consumers will be more upset than usual if they have to pay more without a concurrent increase in product quality. Price promotions work best when the economy grows and when consumers can easily try out new, high-quality brands at affordable prices. When the economy contracts, consumers focus primarily on avoiding bad outcomes and therefore they will be much more hesitant to explore new options.
Price promotions are a particularly bad idea for (luxury) brands that usually do not compete on price. Consumers consider such moves unusual, which increases the salience of the price attribute even more.
Innovations
For largely the same reasons as mentioned previously, it is also common to lower R&D investments and reduce new product launches when times are tough.
However, research shows a higher increase in return on R&D investments during recessions, making them potentially very lucrative, leading to higher growth and better long-term performance. More specifically, products launched during a moderate recession show higher long-term survival rates than the average newly launched product. Survival prospects are significantly lower in severe recessions due to demand slumps.
Being proactive can lead to a first-mover advantage if you are able to launch new products immediately after an economic downturn when competitor activity is still low.
Taken together, these findings show that an economic downturn presents equally much a business opportunity as a threat. Those with enough resources to increase their marketing spending and/or the flexibility to invest their marketing budgets more smartly may get a leg up on their competition.
Hence, the quote attributed to Churchill that “you should never let a good crisis go to waste” also applies to developing the right marketing strategy.
Successful companies act proactively and do not have a wait-and-see attitude. When a downturn hits, they adjust their spending to achieve optimal returns on their investments. In fact, the best even prepare before crises by investing in their brand and customer equity, as these assets are sticky and help to attenuate the negative consequences of a recession.
Building on the proverb that “those who cannot remember the past are condemned to repeat it”, the aim of this article was to learn lessons from the rich body of the business cycle research in marketing. If history has made one thing clear, it is that economic crises come and go and that their occurrence is nearly impossible to predict in advance.
Hence, it is better to be prepared for challenging times. After all, opportunity does not waste time with those that come unprepared.
Good luck!
References:
Berk Talay, M., K. Pauwels, & S.H. Seggie (2012) To launch or not to launch in recessions? Evidence from over 60 years of the automobile industry. Marketing Science Institute Working Paper Series Report No. 12-109.
Dekimpe, M.G. & B. Deleersnyder (2018) Business cycle research in marketing: a review and research agenda. Journal of the Academy of Marketing Science 46(1): 31―58.
Hanssens, D. (2015) Empirical Generalizations about Marketing Impact (Relevant Knowledge Series). Marketing Science Institute, Cambridge Massachusetts.
Pauwels, K. (2020, April 24) Myths on marketing in recession. Smarter Marketing with Better Results. https://analyticdashboards.wordpress.com/2020/04/10/myths-on-marketing-in-recession/.