How to market in a downturn: lessons learnt from history
While the COVID-19 pandemic has resulted in an unprecedented impact on business conditions and consumer spending, particularly in Australia, global recessions are not new, even though their causes may vary. From the great depression of the 1920s, the two world wars, the OPEC oil crisis and most recently the GFC, the economic foundations of modern society has been tested enough times over the past century for us to see patterns in the way organisations – and their marketing responses – have survived during unexpected and severe downturns. And the analysis of these responses can be traced back to the work of an early marketing pioneer and genius.
Roland Vaile completed his Masters at Harvard in 1924. It would be a quarter of a century before the young Californian, along with fellow marketing legend Reavis Cox, would publish the masterwork Marketing in the American Economy.
Graduating from Harvard after the Depression of 1920 and 1921 meant that he was looking for a job just as the economy started to boom again. The 18-month recession, caused by the economic hangover of the First World War, also provided rich empirical territory to explore Vaile’s life-long obsession with advertising and its impact on the economy.
Vaile had spent his year at Harvard following the fortunes of 250 firms. Using secondary data and an occasional survey, he followed these companies through the recession and into the growth period that ensued. Tracking both advertising investment and annual revenues, Vaile was able to divide the firms into three groups: those that did not believe in advertising, those that cut back advertising during the Depression and those that increased it.
His results demonstrated that companies that increased their ad budgets during the recession grew sales much faster than their rivals – not only during the downturn but also beyond it. Companies that decreased their advertising spend saw their sales decline both during the recession and then for the following three years. In relative terms, these companies actually underperformed even those that elected to do no advertising at all.
In every recession marketers find themselves in poorly charted waters because no two downturns are exactly alike. However, in studying the marketing successes and failures of dozens of companies as they’ve navigated recessions from the 1970s onward, patterns have been identified in consumers’ behaviour and firms’ strategies that either propel or undermine performance. Companies need to understand the evolving consumption patterns and fine-tune their strategies accordingly.
During recessions, of course, consumers set stricter priorities and reduce their spending. As sales start to drop, businesses typically cut costs, reduce prices, and postpone new investments. Marketing expenditures in areas from communications to research are often slashed across the board—but such indiscriminate cost cutting is a mistake.
Although it’s wise to contain costs, failing to support brands or examine core customers’ changing needs can jeopardise performance over the long term. Companies that put customer needs under the microscope, take a scalpel rather than a cleaver to the marketing budget, and nimbly adjust strategies, tactics, and product offerings in response to shifting demand are more likely than others to flourish both during and after a recession.
Understanding Recession Psychology
In frothy periods of national prosperity, we sometimes forget that rising sales aren’t always caused by clever advertising and appealing products alone. Purchases depend on consumers’ having disposable income, feeling confident about their future, trusting in business and the economy, and embracing lifestyles and values that encourage consumption.
But by all accounts, this coronavirus-induced recession is the severest since the Great Depression. Prolonged periods of home-isolation and the continuous wave of bad economic news is eroding confidence and buying power, driving consumers to adjust their behaviour in fundamental and perhaps permanent ways.
The first step in responding must be to understand the new customer segments that emerge in a recession. Marketers typically segment according to demographics (“over 40,” say, or “new parent” or “middle income”) or lifestyle (“traditionalist” or “going green”). In a recession such segmentations may be less relevant than a psychological segmentation that takes into consideration consumers’ emotional reactions to the economic environment.
Think of customers as falling into four groups:
The slam-on-the-brakes segment feels most vulnerable and hardest hit financially. This group reduces all types of spending by eliminating, postponing, decreasing, or substituting purchases. Although lower-income consumers typically fall into this segment, anxious higher-income consumers can as well, particularly if health or income circumstances change for the worse.
Pained-but-patient consumers tend to be resilient and optimistic about the long term but less confident about the prospects for recovery in the near term or their ability to maintain their standard of living. Like slam-on-the-brakes consumers, they economize in all areas, though less aggressively. They constitute the largest segment and include the great majority of households unscathed by unemployment, representing a wide range of income levels. As news gets worse, pained-but-patient consumers increasingly migrate into the slam-on-the-brakes segment.
Comfortably well-off consumers feel secure about their ability to ride out current and future bumps in the economy. They consume at near-prerecession levels, though now they tend to be a little more selective (and less conspicuous) about their purchases. The segment consists primarily of people in the top 5% income bracket. It also includes those who are less wealthy but feel confident about the stability of their finances—the comfortably retired, for example, or investors who got out of the market early or had their money in low-risk investments such as CDs.
The live-for-today segment carries on as usual and for the most part remains unconcerned about savings. The consumers in this group respond to the recession mainly by extending their timetables for making major purchases. Typically urban and younger, they are more likely to rent than to own, and they spend on experiences rather than stuff (with the exception of consumer electronics). They’re unlikely to change their consumption behaviour unless they become unemployed.
Regardless of which group consumers belong to, they prioritize consumption by sorting products and services into four categories:
All consumers consider basic levels of food, shelter and clothing to be essentials, and most would put transportation, technology and medical care in that category. Beyond that, the assignment of particular goods and services to the various categories is highly idiosyncratic.
Throughout a downturn, all consumers except those in the live-for-today segment typically re-evaluate their consumption priorities. We know from previous recessions that such products and services as restaurant dining, travel, arts and entertainment (streaming services are an exception), new clothing, cars, alcohol, appliances and consumer electronics can quickly shift in consumers’ minds from essentials to luxuries, postponables, or even expendables, depending on the individual. As priorities change, consumers may altogether eliminate purchases in certain categories, such as household services (cleaning, garden maintenance), moving them from essentials, say, into expendables. Or they may substitute purchases in one category for purchases in another, perhaps swapping dining out (a treat) for cooking at home (an essential). And because most consumers become more price sensitive and less brand loyal during recessions, they can be expected to seek out favourite products and brands at reduced prices or settle for less-preferred alternatives. For example, they may choose cheaper private labels or switch from organic to nonorganic foods.
Managing Marketing Investments
During recessions it’s more important than ever to remember that loyal customers are the primary, enduring source of cash flow and organic growth. Marketing isn’t optional—it’s a “good cost,” essential to bringing in revenues from these key customers and others.
Still, company budget cuts often affect marketing disproportionately. Marketing communication costs can be trimmed more quickly than production costs—and without letting people go. In managing their marketing expenses, however, businesses must take care to distinguish between the necessary and the wasteful. Building and maintaining strong brands—ones that customers recognise and trust—remains one of the best ways to reduce business risk.
Begin by performing triage on your brands and products or services. Determine which have poor survival prospects, which may suffer declining sales but can be stabilized, and which are likely to flourish during the recession and afterward.
Your strategic opportunities during the downturn will strongly depend on which of the four segments your core customers belong to and how they categorise your products or services. For example, prospects are reasonably good for value-brand essentials sold to slam-on-the-brakes consumers, who will forgo premium brands in favour of lower prices. Value brands can also effectively reach out to pained-but-patient consumers who previously bought higher-end brands, a strategy Kmart aggressively used with its “everyday low prices” policy in the 2001 recession. Value brands have opportunities with postponable products, as well. Repair services can market to the pained-but-patient group, who will try to prolong the life of a refrigerator rather than buy a new one.
Where the business opportunities are uncertain or declining, it may be time to part with brands or products that were ailing prior to the recession and are on life support now. For those that remain, companies should concentrate their marketing resources on maintaining relevance to core customers in order to sustain brands through the recession and into the recovery.
Allocate for the long term.
When sales start to decline, companies shouldn’t panic and alter a brand’s fundamental proposition or positioning. For instance, marketers catering to middle- or upper-income consumers in the pained-but-patient segment may be tempted to move down-market. This could confuse and alienate loyal customers; it could also provoke stiff resistance from competitors whose operations are geared to a low-cost strategy and who have intimate knowledge of cost-conscious customers. Marketers that drift away from their established base may attract some new customers in the short term but find themselves in a weaker position when the recession ends. The best course is to stabilise the brand. Even cash-poor firms would be wise to commit a substantial portion of their marketing resources to reinforcing the core brand proposition. Reminding consumers of how the brand matters can add to the cushion provided by previous investments in building the brand and customer satisfaction.
Where opportunities are stable or uncertain (but leaning toward stable), firms should push their advantage. In past downturns, consumer goods companies that were able to increase share of voice by maintaining or increasing their advertising spending captured market share from weaker rivals. What’s more, they did it at lower cost than when times were good. On average, increases in marketing spending during a recession have boosted financial performance throughout the year following the recession. (Of course, not all increases have raised performance. Therefore, resources should be judiciously targeted to viable business opportunities.)
In deciding which marketing tactics to employ, it’s critical to track how customers are reassessing priorities, reallocating budgets, switching among brands and product categories, and redefining value. It’s therefore essential to continue investing in market research. As the recession winds down, consumers will regain buying capacity but possibly will not return to their old purchasing patterns. Market research should explore whether consumers will go back to familiar brands and products, stay with substitute products, or welcome innovations.
In recessions, marketers have to stay flexible, adjusting their strategies and tactics on the assumption of a long, difficult slump and yet be able to respond quickly to the upturn when it comes. This means, for example, having a pipeline of innovations ready to roll out on short notice. Most consumers will be ready to try a variety of new products and services once the economy improves. Companies that wait until the economy is in full recovery to ramp up will be at the mercy of better-prepared competitors. Even during a recession, new products have an important place. Live-for-today customers, with their undiminished appetite for goods and experiences, often appreciate novelty. And the other segments will embrace new products that offer clear value compared with alternatives. Because new-product activity slows in recessions overall, launches can economically gain visibility.
Balance the communications budget.
During recessions cash-strapped marketing departments are under pressure to do more with less and demonstrate high returns on investment. Typically, the share of the advertising budget devoted to broadcast media shrinks, whereas the share that goes toward efforts with more-measurable results, such as direct marketing campaigns and online, grows. Point-of-purchase marketing—promoting price cuts or generating in-store excitement—also tends to pick up during recessions.
Online advertising in particular is targeted and relatively cheap, and its performance is easily measured. Despite a deepening recession, marketers spent 14% more on online ads over the first three quarters of 2008 than they did over the same time frame in the previous year. Another factor driving this growth in digital-ad spending is consumers’ migration to online social media such as Instagram, Facebook and LinkedIn, which help people intensify networking efforts amid higher unemployment and a tough job market. T
That said, broadcast media still remain important for building mass-market consumer brands. Although strong brands can be carried for a period on the momentum of previous brand-building investments, no brand can afford to coast solely on earlier efforts. Brands that are out of sight on the television screen will sooner or later be out of mind for a large percentage of consumers.
Consider how PepsiCo has adjusted its marketing: Management first used past experience to assess the impact the downturn would have on each category of drinks. It then reassigned marketing resources to volume-growth opportunities rather than making across-the-board cuts. For instance, even though carbonated beverages (especially non-diet) had been gradually losing share before the recession, consumers consider them to be a good refreshment value—so management reasoned that the recession should not force a steep decline in the category. All four consumer segments view them as either essentials or treats, and the tried-and-true Pepsi brand should hold up well in a recession.
Marketing Throughout a Recession
During downturns, marketers must balance efforts to pare costs and shore up short-term sales against investments in long-term brand health. Streamlining product portfolios, improving affordability, and bolstering trust are three effective ways of meeting these goals.
Streamline product portfolios.
When faced with declining demand, marketers should continue to reduce excessive complexity in product lines that feature too many marginally performing sizes and flavours or trivial differences among product models. Overly broad product lines soak up marketing costs and tie up resources and working capital in slow-moving inventory. However, streamlining the product portfolio does not mean shutting down the innovation pipeline. Innovative improvements to core products will grab attention and motivate purchases, particularly of expendable goods and services.
Realignment with market conditions requires frequent reforecasting of demand for each item in a product line as customers’ buying habits shift. For instance, slam-on-the-brakes consumers will sacrifice variety or customisation in favour of simplicity and lower prices on essentials and treats. In the case of durables purchases that cannot be postponed, pained-but-patient consumers will trade down to models that stress good value rather than enhanced features. Consumers in both segments will reject products with features that diminish durability or increase operating costs.
Slam-on-the-brakes and pained-but-patient customers in particular will be shopping around for the best deals. All businesses will increasingly compete on price.
In tough times, discounts that require little effort from consumers and give cash back at the point of sale are more effective than delayed-value promotions such as sweepstakes and mail-in offers. Many marketers will need to increase the frequency and depth of temporary price promotions. At the same time, they must carefully monitor consumers’ perceptions of “normal” price levels: Excessive promotions lead consumers to revise their expectations about prices downward and can threaten profitability in the recovery period because people will resist the steep increases as prices return to “normal.” Extreme price deals can also lead to costly price wars.
While premium-brand market leaders shouldn’t move their brands down-market, they can introduce a “fighter brand,” a lower-priced version of the premium offering sold under a different name and backed by minimal advertising.
In addition to offering temporary price promotions or list-price changes, companies can improve affordability by reducing the thresholds for quantity discounts, extending credit to their customers, or having layaway plans. Reducing item or serving sizes, and then pricing them accordingly, is another effective tactic. For service businesses such as cable and mobile telephone companies, lowering consumers’ up-front adoption costs and reducing penalty charges can help attract cost-conscious and cash-poor consumers. Depending on whether customers are seeking the lowest absolute price or the most bang for their buck, service businesses can, respectively, unbundle offerings or fold more services into the bundle—or offer both options.
Worried consumers—even in the comfortably well-off and live-for-today segments—see familiar, trusted brands and products as a safe and comforting choice in trying times. Reassuring messages that reinforce an emotional connection with the brand and demonstrate empathy (for example, by conveying a sense that “we’re going to get through this together”) are vital.
Empathetic messages must be backed up by actions demonstrating that the company is on the customer’s side. If sales are declining, the last thing to do is take the problem out on customers by reducing quality while raising prices. Loyalty programs should reward not just big-time spenders but also people who purchase small amounts frequently. Rather than simply impose ever higher fees on customers who exceed their credit-card limits, card issuers should alert people when they are close to going over their limits. Retailers can educate consumers on how to shop smart and save money.
While it is important to build emotional connections, don’t neglect to reinforce trust by reminding customers that buying the brand is a sound decision.
Positioning for Recovery
Survivors that make it through this recession by focusing their attention on consumer needs and core brands will be strongly positioned for sunnier days ahead. However, companies must understand how people’s behaviour may change following the recession so they will be able to offer products and communicate messages aligned with the needs of new consumer segments.
After most recessions have ended, consumers’ attitudes and behaviours return to “normal” within a year or two. Following more extreme downturns, though, consumers’ heightened sense of economic vulnerability can persist for a decade or longer. The deeper and more prolonged a recession is, the greater the possibility that there will be profound transformations in consumers’ attitudes and values. Witness the long-lasting caution regarding consumption characterizing Americans who lived through the Great Depression or present-day Japanese who endured a stagnant economy throughout the 1990s.
Usually, repercussions are not so extreme as that. In the United States, postwar recessions have lasted an average of 10 to 11 months. The harshest were the 16-month-long recession of 1973–1975, during which consumption growth was –0.9%, and the 18-month “double-dip” recession of 1980 and 1981–1982, during which consumption growth was negative in the first dip but rebounded in the second. The last recession, in 2001, saw no decline in overall consumer spending, although many individuals cut back.
However, the current recession, as noted, is unusually severe, and consumer confidence and trust in business are at record-breaking lows. Given these facts, there is a good possibility that consumer attitudes and behaviour shaped during this recession will linger substantially beyond its end. While the comfortably well-off and live-for-today segments may carry on as usual, the slam-on-the-brakes and pained-but-patient segments—by far the large majority of consumers—may well retain the consumption habits they’ve learned. They’ll seek value and trusted brands, remain considered in their purchases of treats, and continue to delay purchases of postponables. Consumers can also be expected to retain their distrust of business, an attitude forged by the corporate malfeasance that fuelled this recession.
This profile suggests two lessons for marketers. First, the discipline around marketing strategy and research they developed during the recession—and the ability to respond nimbly to changes in demand—will continue to serve them when the economy recovers. And second, they should prepare now for a possible long-term shift in consumers’ values and attitudes. The shock of the downturn and anger about the abuses that drove it promise to accelerate pre-existing trends toward reduced materialism, commitment to sustainability, higher expectations of corporate social responsibility, and resentment of cynical marketing that treats people as soulless and mechanical consumers. Increasingly, customers will demand that business act in their and society’s best interests and will factor company practices into their brand choices. During and after the recession, it would be foolhardy for marketers to ignore those changing expectations. While businesses are putting customers under a microscope, their customers are, in turn, examining them more closely than ever.
Source: Harvard Business Review.