Issue 14 - August 2009
(special thanks to Associate Professor Rachel Kennedy - Ehrenberg-Bass Institute)
It seems the recession has all but melted into economic optimism with talk of interest rates barely being restrained on the upward path and banks the world over reporting profits equal to the ‘good old days’ of 2006/7. The timing of a useful piece on “marketing during a recession” might appear out of sync with the current business spirit. However, so impressed were we with a recent public presentation by Rachel Kennedy of the Ehrenberg-Bass Institute, we had to pass on at least some of the insights offered just in case not all goes to plan over the next 6-12 months.
Recessions aren’t new, Australia has experienced numerous since the turn of the last century. Each has had its own idiosyncrasies, and as far as recessions go, the current one lacked the severity of some even though its potential was perceived to contain a much greater downside. Researchers at the Ehrenberg-Bass Institute have studied consumer behaviour during these economic troughs and, drawing on the empirical evidence, have established some clear, and in our opinion, sensible guidelines for marketers to consider. After our summary, we’ve put forward an ad for Evian which is rumoured to be very high on the ‘likeable’ scale.
Decades of observation have reinforced just how habitual consumers are. During a recession, many (but not all) consumers have less money to spend and/or have less access to credit. Non-regular buying behaviour is affected most. That is, many consumers are likely to postpone the purchase of more expensive discretionary items. No rocket science here! But that doesn’t mean we lose the desire to own a new Porsche, we simply might put off the purchase for a future date. Just as likely, consumers seek to economise in small ways, like buying private label goods (eg. home brand), rather than national brands, at least for a few of their purchases. Private label brands are counter-cyclical, so as the economy declines, sale of private labels increase. However, as the economy recovers, switching back to national brands is less than 100%, meaning some of the shift is permanent. By the same token, a proportion of consumers appear ‘immune’ to private labels and refuse to purchase them. These trends don’t only affect groceries, but a wide range of consumer goods and the term ‘private label’ could be substituted for any generic brand. For powertools, instead of a national brand like Makita, we might settle for a GMC or Ozito and this would apply to home handies as well as the trades.
Relative Pricing
Pricing of your product or service during a recession can be critical. The good news is that doesn’t suggest you can’t move prices at all, but the research suggests caution when doing so. There are some simple rules to be aware of. In a time of rising prices, if you raise your prices with competitors, there is a lower risk of an adverse market reaction. Competitive parity in magnitude and timing is well advised. Other factors that cause greater reactions due to price changes include:
1. An increase in price compared to the same (magnitude) decrease
2. Passing (exceeding) a reference price
3. Your product/service is priced near average, or the number of
competitors you pass (exceed)
4. Your brand is small (in terms of market share) and you increase prices
5. The price moves past that of the market leader
6. The price (rise) is signaled
Price promotion anytime is dangerous, but during recessions should be particularly avoided where possible.
Advertising
To quote Henry Ford, “A man who stops advertising to save money, is like a man who stops a clock to save time”. We couldn’t agree more, but if you have to cut ad spend to survive, then do it. Like pricing, if you cut ad spend in line with competitors, the likelihood of an adverse reaction is limited. Maintaining parity with your competitive set is again most important, as it all comes down to what is known as ‘share of voice’.
Big brands may have greater elasticity being able to survive on momentum generated weeks or months ago, but smaller brands will be quickly forgotten if their share of voice drops away significantly. That’s not to say you need to spend more, or even the same as previously. Share of voice is relative, if your industry is backing off, do so. Keep in mind that during recessions the media is also suffering, and often willing to extend healthy discounts.
How much should you spend? According to Dr Kennedy, there is a theorem for optimising the ad budget. “If advertising elasticity is 0.10, the optimal advertising budget is always 10% of gross profits. Optimal advertising is the ad elasticity multiplied by gross profits (this is supported by an algebraic proof).”
And if your ad budget is slashed? The answer - improve your ‘productivity’. More so in recessions, the advertising spend must match performance. This means striving for clear branding within ‘likeable’ ads. (Ads that consumers like are more likely to be watched than those they don’t like.) This suggests putting pressure on your ad agency to develop ads that have a dual purpose, a memorable ad (likeability) with strong branding rather than one or the other. Additional advice includes re-using, recycling or re-inventing ads that worked in the past. This strategy makes good use of existing memory structures that make the brand easy to recognise (and buy). Next, undertake a thorough assessment of the media spend and scheduling. Avoid being lured into buying cheap media that over-saturates the market. Spending more won’t fit your budget if performance doesn’t increase to match.
Dr Kennedy suggests you focus on reach rather than frequency. The evidence being that the greatest change (in purchase behaviour) is achieved after one ad exposure. Additional exposures result in significant diminishing returns (see the graph below). Therefore it is more productive to get to many once, rather than a few many times.
Every sale counts during recessions and you need to recognise that your “light-use buyers” are as important, as “heavy-use buyers” – every brand needs both. Light-use buyers can make up 80% of your market, representing from 40-60% of total sales, and are much easier to lose. This means you’ve got to remind them of your product and brand, so keep advertising (within your means).
Quality Matters
Consumers are savvy and offering quality that they understand will pay dividends. Rather than reduce quality, consider repackaging into smaller sizes. The market also craves a little luxury during tight economic times as evidenced by chocolate sales of late.
Summary
In summary, there are a few rules that if heeded, will put your company in better stead than many during a recession downturn (if not this one, perhaps the next).
Consumers are creatures of habit. Where ever possible, support a ‘business as usual’ strategy. Marketers’ behaviour tends to change more than consumers’. Adopt a consistent approach, especially with ‘everyday’ products and services.
Be realistic, lower growth targets, but maintain marketing support activities.
Keep up with competitors, and keep pricing increases/decreases relative.
Don’t price promote any more than absolutely necessary.
Remember your light-use customers, they are a large portion of your business and can significantly influence your bottom line.
Competitors’ advertising behaviour changes, and this can provide an opportunity to match or gain ‘share of voice’ to enhance productivity. Again, be consistent with ad spend where possible.
Focus advertising on reach (as many category users as possible). Critically assess media schedules and spend, avoid buying excess frequency.
Maintain quality of product and service. Consider re-sizing packaging to match price targets. Little luxuries can go a long way.
Contact NrG Advertising for more information or assistance with your marketing objectives.
As mentioned earlier, Evian appears to be on a winner with a tvc rating high on the 'likeable' scale. In a recession, Evian once again threw a very big bag of cash at part two of their long running 'Baby' series (part one was 11 years ago). Is it money well spent? Let's see... nearly 20 million hits on YouTube to date is a pretty good start.
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