Tuesday, April 21, 2009

How to Market in a Recession

By John A. Quelch and Katherine E. Jocz

Recessions change consumer attitudes and consumer behaviors. Sometimes these changes are just transient coping mechanisms that will disappear once the recovery returns. But the current recession may be so long and so deep that the attitudes and behaviors of a large percentage of consumers will change permanently, and in ways that will challenge marketers.

Understand Consumer Behavior
The starting point for any recession-based marketing plan is the consumer. As consumer confidence evaporates, their price sensitivity increases. Even those who can still afford to spend become bolder in asking for deals, empowered by the expectations of lower prices that accompany any economic slowdown. Higher price sensitivity leads consumers to spend more time searching for the best deal and evaluating the price/performance trade-offs among alternative brands. Consumers typically make fewer purchases on impulse and spend more time planning ahead. Those who still have cash on hand may stock up when promotion offers are especially attractive.

Different products and services are more or less vulnerable to changes in consumer behavior. People will still buy essentials such as toothpaste and basic food products, but even here, consumer behaviors may change. The purchaser of organic produce may trade down to nonorganic; the purchaser of frozen vegetables may trade down to canned; the purchaser of a brand like Green Giant may switch to a store brand instead.

Perhaps the most vulnerable categories of consumer goods are durables. Their purchase can be postponed and, in some cases, may have to be postponed if consumer credit is not available. The precipitous decline in auto sales is mirrored in corresponding declines in sales of new kitchen appliances, aggravated by the fall in new home construction. In normal times, many durable goods sales depend on new products with new features accelerating the purchase cycle ahead of consumers’ existing equipment breaking down. In a recession, consumers will hold on to their existing equipment longer. That’s good for repair services, but not for new product sales.

Services can also fall into the categories of essentials and postponables. Instead of that dream Mediterranean cruise, a consumer may have to settle for a seaside rental closer to home. On the other hand, disconnecting your cell phone service is unlikely. Though certain add-on, discretionary features might be cancellable, many consumers have monthly bank or credit card autopayment of their telephone charges, so the effort involved in switching or changing service becomes a barrier to behavior change. Nevertheless, NetZero has recently run an effective campaign advertising the lower cost of dial-up internet versus broadband.

It is essential that companies understand how its core consumers are thinking about the recession. This requires investing in new market research studies, understanding the evolving price elasticity of demand for your brand and your product category, and perhaps even developing a new consumer segmentation typology based on price sensitivity, value orientation and buyer confidence.

B2B marketers need to apply the same discipline to their customers. Some customers will be cash poor and looking for supplier credit and extended terms. Other distributors will be cash rich but will still cry poverty to extract better terms from their suppliers. B2B marketers must appraise the financial viability of their customers and align themselves with those that will survive and, indeed, gain market share during the downturn. Particularly during a long, hard recession, it is inevitable that some customers and distributors will fail. While the good marketer—whether B2C or B2B—should try to hold the customer’s hand to get through the tough times together, he or she must be careful not to ship product and extend terms to customers that are poor risks.

Deliver Value
During a recession, marketers—even those selling luxury merchandise—should emphasize value more than ever:

  • The typical appliance product line will emphasize stripped-down models with fewer bells and whistles and built-in options.
  • Products and services will be unbundled to permit cash-strapped customers to pick what they truly need.
  • Multiple purpose products such as Vaseline Intensive Care or Nivea become more attractive compared to special purpose creams.
  • Individual package sizes of candy bars or the number of cans in a Pepsi multipack may be downsized to enable the manufacturer (and retailer) to continue to hit attractive retail price points.
  • Liquor marketers may launch a fighting brand to provide the price sensitive consumer with an attractively priced alternative so the premium brand’s price (and profit margin) does not have to be slashed to maintain category share.

But whatever adjustments companies make to their product portfolios, quality must high. To do otherwise will be to risk eroding brand equity and shareholder value for the long term.

Marketers must also reassess the allocation of their marketing expenditures. In some cases, it will be necessary to shift some portion of the budget from franchise-building brand advertising to short term promotion activity that will move product, on a pay-as-you-go basis, next Monday morning. Consumers clip more coupons, fill out more sweepstakes entries, and go after more deals in a downturn. They are most interested in immediate cash savings at the point-of-sale that require minimal effort to obtain but many are also more willing than ever to fill out the forms to qualify for mail-in rebates.

The traditional media advertising budget is always under pressure in a recession. Like new product research and management training, advertising is vulnerable because expenditures cannot be linked clearly to sales. What companies need to know is that a sustained (rather than stop-go) investment in advertising builds brand equity and shareholder value; that when competitors are cutting back, just maintaining your ad spend will increase your share of voice and therefore your opportunity to capture more market share; and that the cost of capturing an additional share point in a recession is invariably lower than when times are good.

Typically, a recession is unlikely to induce experimentation and adoption of innovation. However, for several reasons, we expect this recession to accelerate the growth of digital marketing. Consumers will be spending more time at home in front of their computers rather than going out on the town. They will be researching best value products using Internet price search engines. Worried about their job security in the face of economic gloom, they will be staying close to friends and building their virtual networks through Facebook, LinkedIn, and other social networking sites. The average American spends around 25% of his or her media interaction time on the Internet, yet only 7% of U.S. media advertising is assigned to the Internet. It’s time to close that gap. Those marketers bold enough to build their digital brand presence, encourage user-generated content, and create powerful brand communities during this recession will emerge stronger on the other side.

The messages that marketers send to their consumers may also need a rethink. When times are tough, never use fear appeals and zany humor. Ads that emphasize value combined with the reassurance that comes from using a reliable, trusted brand are more appropriate. Procter & Gamble’s Ivory dishwashing liquid currently allocates a third of its media advertising messages to ads that show how many more dishes it can clean compared to cheaper, lower quality private label look-alikes. A similar side-by-side comparison ad demonstrates Bounty’s superior absorbency compared to private label paper towels. In another category, the “That’s Value. That’s Aleve” campaign stresses that the consumer need take only one pill every twelve hours versus one every two to four hours for Tylenol and Advil.

Consumers may become more hard-nosed about functional benefits and price-performance trade-offs during a recession, but they still need emotional support. Ads that show how using the brand can promote family relationships and friendships are especially appealing. Just as Pepsi built its “new optimism” project around President Obama’s inauguration, Coca-Cola’s new “open happiness” campaign targets consumers longing for comfort and emotional support. And there is always room for a creative and emotionally uplifting ad such as British Airways’ depiction of its new Terminal 5 at Heathrow as a wondrous aquarium.

Control Costs, Seize Opportunities
Tough times call for tough actions. The drive for value delivery provides the perfect excuse for tightening cost controls. Cash is king and marketers must work closely with the finance department to lower their cost structures and to understand the balance sheet as well as the income statement implications of their marketing initiatives. Marginal or unprofitable products in the portfolio should be weeded out to reduce complexity costs. Tough conversations should be initiated with unprofitable customers to see how to reduce the cost to serve them. Marginal distributors should also be cut, along with underperforming suppliers and underperforming staff. New sales promotions should be simply designed so as not to reduce manufacturing efficiency.

Companies should aim to reduce fixed costs through disposing of noncore assets, closing excess capacity, consolidating suppliers and outsourcing so long as quality control is not jeopardized. Some ways to shift fixed costs to variable including transitioning salesperson compensation from salary to commission and shifting media spend from advertising to direct marketing and promotional offers tied to individual products. Companies with the leanest cost structures in their industry can be transparent in their pricing and will stand to gain share over those with frills. For example, Wal-Mart can be expected to outperform Target in a recession, but vice versa when the economy is doing well.

Companies should be wary of overshooting in their cost-cutting. They should take a scalpel to their budgets, not a sledgehammer, cutting the fat but not the muscle. No one knows quite when the economic recovery will begin. When it occurs, the speed of recovery may be dramatic. To the extent that competitive conditions permit, marketers need to retain some slack in their planning process so that they can respond promptly to the uptick in demand when it occurs.

Concluding Thoughts
There are opportunities in a recession:

  • It provides any company with the opportunity to rebase its cost structure.
  • It may provide an opportunity to pick up market share at low cost.
  • It may motivate a useful reassessment of the organization’s business model.

It’s worth remembering that many brilliant commercial ideas have been inspired by the need to find better ways of delivering value to customers during economic downturns. Jack Bogle formed the Vanguard mutual fund group and Charles Schwab set up Schwab & Co. in the face of the recession of the early 1970s. Bill Gates launched Microsoft during the recession of the early 1980s. That’s why the Chinese characters for “crisis” also translate as “opportunity.”

About the Authors:

John A. Quelch is the Lincoln Filene Professor of Business Administration at Harvard Business School. He is coauthor, with Katherine E. Jocz, of Greater Good: How Good Marketing Makes for Better Democracy, published by Harvard Business Press.

Katherine E. Jocz is a research associate at Harvard Business School. She is coauthor, with John A. Quelch, of Greater Good: How Good Marketing Makes for Better Democracy, published by Harvard Business Press.

Wednesday, April 8, 2009

Are you ready to exit?

From our Kent Frese, LMI partner in PA, who specializes in Exit Planning.


Do you have a plan to exit your business on your terms? There are three key areas that need to be examined and strengthened: financial, management and legal.

You may want to consider the following from a recent PricewaterhouseCoopers Family Business Survey for 2007/08:

"..While many entrepreneurs happily devote their time and energies to building a business, they pay less attention to what will happen when they are no longer running the show. They find it difficult to address issues like illness, incapacity, retirement and death, and therefore postpone dealing with such problems..."

  • One-quarter of the family firms in the survey are due to change hands within the next five years.
  • Half of those companies are expected to remain in the family. Yet almost half of all responding companies have no succession plan, and the percentage is even higher in small firms or those that have been in business for fewer than twenty years.
  • A surprisingly high percentage of family business owners have also failed to gauge their potential tax exposure, and are unaware of the domestic capital gains tax or inheritance tax liabilities they may have accrued.
  • Eighty-four percent of the respondents aim to pass their companies on to their descendants.
  • Two-thirds of family businesses have no defined criteria for choosing which family members who want to take an active role in the company should be allowed to do.
  • More than half also employ relatives without requiring them to compete for their jobs on the open market.
  • More than two-thirds of companies in the survey had no procedures in place for dealing with disputes between family members.
To learn more about Exit Planning, contact me or Kent to discover how you can control the process!