How to change marketing in recession
Prof. dr. Koen Pauwels
Top AI Leader 2024, best marketing academic on the planet, ex-Amazon, IJRM editor-in-chief, vice dean of research at DMSB. Helping people avoid bad choices and make best choices in AI, retail media and marketing.
With two quarters of negative GDP growth, the US has entered a recession. Advice abounds on how to market in a recession, but where’s the evidence? As my startup university’s founder exclaimed: ‘Koen, all my managers tell me to cut advertising spending and product launches and give more price promotions instead. All the academic articles I read tell me to increase advertising and R&D. My conglomerate operates very different apparel and banking companies across 6 countries. What should I do?’
The answer, as always, is that it depends, and we discussed his different brand and country situations; drastically cutting back for some, and drastically increasing marketing for others (see point 3 below). First though, let’s review the evidence on what works on average, based on past recessions.
1)????Cutting product launches and marketing communication costs you in the long run
At the start of the last recession (hello pandemic), this point was made by Byron Sharp, Mark Ritson, AdAge, Engagement Labs (for B-to-C brands) and Peter Field (for B-to-B markets) but questioned by Robert van Ossenbruggen with the argument the evidence is mostly based on comparing different brands, which differ in many ways from each other.
However, the benefits of maintaining product launches and advertising spending are conformed in dozens of studies , many of which use time series data and thus control for cross-brand differences. As to product launches, ?Lamey et al. (2012 ) and Kashmiri and Mahajan (2014 ) show higher growth than when they systematically cut such activities, albeit temporarily, in response to adverse economic shocks. My own study with Berk Talay and Steven Seggie demonstrates this at the product launch level for dozens of UK fast moving good categories and in the US automobile industry. The latter represents an acid test because vehicles are high-budget, often bought on credit (which runs low in recessions) and whose replacement is easily delayed. We find that new products launched in recessions have higher long-term survival changes, but also that this benefit evaporates in severe recessions and when the new product is launched too early in recessions. The best launch timing would be a quarter or two before the end of the recession. Historically, recessions last 4-5 quarters, so now is the time to ramp up your R&D and get these new products ready to launch.
As to marketing communication, research has repeatedly shown that maintained or increased advertising spending during recessions often results in ?higher company performance (Deleersnyder et al.?2009 ; ?zturan et al.?2014 ; Kashmiri and Mahajan,?2014 ). For one, your advertising helps consumer talk with positive sentiment about your brand, as demonstrated by Engagement labs :?
2)????Price promotions are LESS effective in a recession
This point was made by Byron Sharp and is correct. If you can sustainably cut the regular price, please go ahead and do so if your consumers are price sensitive and you can stomach the lower margin. If you can’t however, beware the consumers will be more upset than usual when you return to the regular price. Aras Alkis, Berk Ataman and I demonstrated this for 2,178 brands sold in 742 stores operated by 110 retail chains across 50 U.S. markets. Price promotions are most effective when a promotion focus (‘growth mindset’) dominates in the market, as most consumers enjoy the exploration and increased quality benefits a price promotion provides, while not being very upset by a return to regular prices (which they may well be able to afford in boom times). In contrast, when unemployment becomes problematic, the market tends to shift toward a prevention focus (avoid bad outcomes), which we showed yields less sales gains from the temporary price cut. Below figures shows the % peanut butter sales change for a 10% price change along the continuum of low labor market resilience (on the left) to high labor market resilience (on the right).?In markets where the labor market is in trouble (left side), the price decrease lift sales by less than it does in markets where the labor market is resilient (right side).
We do observe interesting differences across product categories. In the New York City data, for instance, tortilla snacks, condensed soup, tonic water and napkins showed the lowest sales benefit of price promotions, while liquid laundry detergents, diapers, whole milk and toilet paper showed the highest in the last financial recession.
3)????What is the optimal spending change in a recession?
To optimize your bottom line , your best spending on any marketing action depends on:
a)????Your product’s contribution margin
b)????Your expected sales
c)????Your marketing effectiveness (how much % sales increase for a 1% spent increase)
Many of us don’t know the latter, but we don’t have to in order to decide how to CHANGE our spending in a recession. Because your contribution and expected sales typically decline, the simple rule is that you should REDUCE your marketing spending unless your marketing effectiveness goes up. The several reasons this may happen:
1)????The same budget gets you higher share-of-voice as your competitors cut back;
2)????The same budget gets you more impressions as the cost per impression drops;
3)????Your brand’s offer is especially appealing?
Coming back to my start-up university’s founder, we realized that competitive clutter decreased for a mainstream apparel brand, and TV advertising helped reach consumers with its value-for-money message. As a result, marketing effectiveness increased, and the brand grew during the recession. In contrast, for banking in Romania, the CEO felt expected sales and contribution margin (the first parts of the formula) would decrease drastically. As a result, the CEO cut deeply, including closing many bank branches and focusing on helping debtors pay their loans. To grow during and after the recession, the bank also specialized on wealthy investors. This combination of protection for debtors and expansion for investors put the bank in a great position to grow in the post-recession recovery period.
What works for your competitors may not work for your brand. Beyond ad elasticity, your contribution margin depends both on your brand’s pricing power to its customers and on your negotiation power with its suppliers. A rich body of research has demonstrated that strong brands are better able to maintain prices in a recession. At the same time, large companies and smart negotiators can get price concessions from suppliers in a recession. Indeed, our case’s conglomerate enjoyed lower costs through this negotiation power. Therefore, the contribution margin may not decrease for your brand, but will for competitors who get squeezed more by customers than they can squeeze suppliers up the value chain. In sum, each competitor can apply the same formula and still end up pursuing very different actions.
Why is reasoning through this so important? Because research findings CONFLICT on whether advertising elasticities down or up in a recession. While Srinivasan et al. (2011) and van Heerde et al. (2013) report the former, Graham and Frankenberger (2011 ) and Steenkamp and Fang (2011 ) find the latter, leading them to recommend higher advertising spending in a recession. Analytic Partners studied over 700 brands in over 45 countries, and found that the majority saw increased ROI (which links directly to ad elasticity) in the Great Recession.
This leaves the question: which brands should increase spending? Peter Field distinguished products in high demand during COVID-19, whose managers should spend on both sales activation and brand building, from products that have supply chain issues, whose managers should focus on brand building.?What are these factors for our current recession? Please let us know!
?
Links to the blogs of marketing in the 2020 recession:
Ad Age:
领英推荐
?
Engagement Labs:
?
Peter Field, B-to-B Institute:
?
Mark Ritson, Marketing Week:
?
Byron Sharp, Ehrenberg-Bass Institute:
A collection of other blogs and examples:
Blog:?Marketing in a time of a crisis - getting ready for the rebound. - marketing across borders Edit
Blog:?Don’t Cut Your Marketing Budget in a Recession – A&C Accounting And Tax Services – Top Quality Accounting, Bookkeeping, Payroll And Tax Services- Oakland, CA Edit
P&G alumnus. Fractional CMO/Head of brand/Consultant/Teacher. Leveraging consumer knowledge to build profitable businesses sustainably. Global FMCG marketer calling New Zealand Aotearoa home. Soccer fan
2 年You know it is a good marketing discussion when the key outcome is ‘it depends’. Thank you for sharing Prof. dr. Koen Pauwels
Marketing Professional @ Brand Architects | Brand & Strategy
2 年Great takes, thank you Professor! High agreement. On pricing, discounts become next entranched prices, but now due to inflation, we have the opposed issue: how to avoid masive price increases, pressed by costs. That’s why, in this revession, I would look carefully at out of pocket and keep strategic price points flexing SKUs (packages). If a company have flexibility to reduce weights, while maintaining the key price points, here is the revenue management. Different type of promo.
Gayfryd Steinberg Professor at The Wharton School
2 年Do any of the studies on claims #1 and #2 rule out selection bias / endogeneity? This question always bugs me when seeing research-based claims on these topics. One would expect non-idiotic managers to launch very promising products even during a recession, but launch marginally promising products only when business conditions are forgiving. That would explain the patterns in much of the data. Looking forward to your thoughts which studies’ study findings cannot be explained by such managerial behavior. Thanks.
Associate Professor of Marketing at KU Leuven, Co-Founder of edocation.org, Bookfluencer
2 年Thanks, very interesting. Recession is one thing, inflation another. Since the last big inflation period in western countries was more than 40 years ago, we don’t know a lot about it (price elasticity increases in absolute terms according to Tammo H.A. Bijmolt et al. 2005, but what about the other 3 P’s?). Hermann Simon just published a great book about it, so far (unfortunately) only in German.
Marketing Geek | Tech Enthusiast | Coffee Addict
2 年Interesting read! Thanks for sharing Prof. dr. Koen Pauwels ???? FYI Rasmus Dominic James Yannis