Consumer goods manufacturers and retailers regularly make critical decisions around the pricing, product, distribution, and promotion that best communicates their firm's value to consumers. These decisions—collectively referred to as marketing mix strategy—are most effective when they are based upon a thorough understanding of the economic environment consumers are faced with on a daily basis. During a recession, the cost-conscious, weary consumer will tend to change their purchasing behavior to be more inline with their own economic prospects. For example, consumers shift toward buying lower-priced store brands and adjust the timing of store visits to take maximum advantages of sales and other promotions.
While shopping for products, consumers typically weigh a product's benefits to its price and make purchase decisions based on the net outcome of such a comparison. Consumers decide to buy a product if its benefits outweigh its price, and forgo the purchase if the opposite is true. During an economic downturn, the price of a product carries a higher weight in a price-benefit comparison. If the price of a product is lower than other products in the same category, promotional campaigns should highlight the price aspect of the product and aim to encourage consumers in a price-benefit comparison. If price is not the most attractive part of the product's attributes, then the promotional policy should aim to prevent consumers from engaging in a conscious price-benefit calculation. An example of such a policy would be an advertising message that highlights the emotional connection of a particular brand with consumers, such as positive childhood memories, instead of focusing on its price.
These arguments also apply to promotional policies at the retail level. If a retailer is positioned as a low-priced or discount store, then the promotional campaign should focus on price comparison with other retailers. However, if low prices are not the most attractive feature of the retailer, then the promotional campaign should focus on connecting with consumers on their emotional attributes.
In addition, retailers also need to consider the following types of promotional strategies during an economic downturn:
- Bulk or large product packages, which have lower unit prices, should be promoted more than smaller items, which have higher prices per unit, because lower price-per-unit items yield more value to consumers. Bigger sizes also allow consumers to wait longer between shopping trips, as the frequency of store visits tends to decline significantly during a weak economy.
- Retailers should carry more necessity items and shift their promotional efforts from traditionally focused items to items that can induce consumer store visits (e.g., frozen dinners, etc.).
This analysis suggests that manufactures and retailers should keep track of key economic indicators (consumer confidence, fuel prices, disposable income, etc.) and design their marketing mix strategy by taking into account overall macroeconomic conditions. The return on a promotional policy is higher if it is customized to the prevailing economic conditions, the retailer's positioning in the market, and their interaction.
The first chart shows the historical change in gross domestic product from fourth-quarter 2006 to fourth-quarter 2008 and IHS Global Insight's forecast through fourth-quarter 2010. The suggested retail strategies would be appropriate for fourth-quarter 2008 to fourth-quarter 2009, when GDP growth is negative or slightly positive.
The second chart shows the percentage change in consumer spending on furniture and food categories. The furniture category is more affected by the recession and, therefore, makes a stronger case (relative to the food category) for retailers in that segment to adopt the promotional policies discussed.
by Antonia Prlic and Hemant Sangwan