Marketers are in unchartered waters during every recession because no two downturns are alike. However, in studying the marketing successes and failures of dozens of companies as they navigated recessions beginning in the 1970s, we discovered patterns in consumer behavior and firm strategies that either propel or undermine performance. Companies must understand changing consumption patterns and adjust their strategies accordingly.
Of course, during a recession, consumers set stricter priorities and reduce their spending. When sales begin to decline, businesses typically cut costs, lower prices, and postpone new investments. Marketing expenditures in areas ranging from communications to research are frequently cut across the board—but this is a mistake.
Although cost-cutting is prudent, failing to support brands or examine core customers' changing needs can jeopardize long-term performance. Companies that examine customer needs with a scalpel rather than a cleaver, and nimbly adjust strategies, tactics, and product offerings in response to shifting demand, are more likely to thrive both during and after a recession.
Recognizing Recession Psychology
During times of national prosperity, marketers may forget that rising sales aren't solely the result of clever advertising and appealing products. Purchases are contingent on consumers having disposable income, being optimistic about their future, believing in business and the economy, and embracing lifestyles and values that promote consumption.
However, by all accounts, this is the worst recession since the Great Depression. The barrage of bad economic news is eroding consumer confidence and purchasing power, forcing them to make fundamental and possibly permanent changes in their behavior. They now recognize that much of Europe and the United States' spending over the last two to three decades has been built on a foundation of debt and dwindling savings and home equity. Marketers aided consumers in materializing the good life and encouraging them to live beyond their means. Consumers are facing piles of bills, stagnant or falling incomes, and shrinking nest eggs as a result of the ensuing meltdown. At the same time, a series of corporate scandals; failures in the financial, housing, and insurance sectors; and taxpayer bailouts of mismanaged businesses have fostered consumer distrust and skepticism of marketers’ messages. It’s no surprise that in January 2009 the Conference Board’s U.S. Consumer Confidence Index sank to the lowest level since tracking started in 1967.
These combined effects create a profound challenge for marketers, not only during the downturn but in the recovery that will eventually follow. 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 your 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 behavior unless they become unemployed.
Regardless of which group consumers belong to, they prioritize consumption by sorting products and services into four categories:
1. Essentials are necessary for survival or perceived as central to well-being.
2. Treats are indulgences whose immediate purchase is considered justifiable.
3. Postpone-ables are needed or desired items whose purchase can be reasonably put off.
4. Expendables are perceived as unnecessary or unjustifiable.
All consumers consider basic levels of food, shelter, and clothing to be essentials, and most would put transportation 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 reevaluate their consumption priorities. We know from previous recessions that such products and services as restaurant dining, travel, arts and entertainment, new clothing, automobiles, appliances, and consumer electronics can quickly shift in consumers’ minds from essentials to treats, postpone-ables, or even expendables, depending on the individual.
As priorities change, consumers may altogether eliminate purchases in certain categories, such as household services (cleaning, lawn care, snow removal), 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 favorite 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. (See the exhibit “Consumer Segments’ Changing Behavior.”)
Consumer Segments’ Changing Behavior
- 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 recognize and trust—remains one of the best ways to reduce business risk. The stock prices of companies with strong brands, such as Colgate-Palmolive and Johnson & Johnson, have held up better in recessions than those of large consumer product companies with less well-known brands.
Surgically trimming the budget is easier to do during a downturn than in prosperous times. Tough times provide an imperative to cut loose poor performers and eliminate low-yield tactics. When survival is at stake, it is easier to get companywide buy-in for revising marketing strategies and reallocating investments. Managers can defy old mind-sets and creatively search for superior solutions to customer needs instead of relying on the next line extension. The challenge is to make well-defended, case-by-case recommendations about where to cut spending, where to hold it steady, and even where to increase it.
- Assess opportunities.
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 categorize 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 favor of lower prices. Value brands can also effectively reach out to pained-but-patient consumers who previously bought higher-end brands, a strategy Wal-Mart 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 near term but find themselves in a weaker position when the recession ends. Their best course is to stabilize 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. De Beers came to this realization after it reduced its U.S. marketing budget early in 2008 in response to the grim economic outlook. When research revealed that diamonds represent enduring value to a majority of consumers, the company doubled its Christmas advertising spending over the previous year’s. Brand-awareness ads in several media proclaimed, “Here’s to less,” and enjoined us to buy “fewer, better things” because “a diamond is forever.” Although Christmas sales in the United States softened compared with the previous year’s, prices were stable—and trends in consumers’ desire to buy diamonds remained healthy.
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, especially in the current, deep recession, resources should be judiciously targeted to viable business opportunities.) Firms with deep pockets can make cost-effective acquisitions that strengthen their brand portfolio or customer base. In the 2001 downturn, Smucker’s acquired the Jif and Crisco brands from Procter & Gamble. These brands were too small for P&G and not in any of its core categories, but they proved to be a good strategic fit for Smucker’s. In the current recession, Smucker’s is acquiring another such brand from P&G—Folgers. Though it does not meet P&G’s margin targets, with renewed marketing attention it has the potential to be an important source of future sales for Smucker’s.
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.
It’s critical to track how customers reassess priorities, reallocate funds, switch brands, and redefine value.
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 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. In 2001, for example, Procter & Gamble’s successful introduction of the Swiffer WetJet established a new product category that eased the chore of mopping floors and weaned consumers away from cheaper alternatives.
- 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 ads, grows. Point-of-purchase marketing—promoting price cuts or generating in-store excitement—also tends to pick up during recessions.
Internet 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 MySpace, Facebook, and LinkedIn, which help people intensify networking efforts amid layoffs and a tough job market. The new-member sign-up rate at LinkedIn, a site that focuses on professional networking, has doubled in the past year.
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. Indeed, while advertising in newspapers and magazines and on radio and local television all declined in 2008, advertising on the four national broadcast television networks in the United States remained steady.
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 nondiet) 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.
PepsiCo’s goal is to reinvigorate its carbonated soft drink category with substantially increased marketing investments in Pepsi, Mountain Dew, and other products. These investments include a new upbeat “Optimism” ad campaign, new packaging, and new point-of-purchase materials. PepsiCo also plans to increase activity in digital media specifically to target the youthful live-for-today segment.
- 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. (See the exhibit “Tailoring Your Tactics” for a detailed look at how to appeal to each consumer segment.)
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