Marketing and the Effects of Recessions
Kay, Mark J., Phi Kappa Phi Forum
A recession is an economic phenomenon of decreased demand. Technically, a recession is usually said to exist when the gross national product or GNP (the total annual economic value of goods and services that a country produces in a given period) declines for two consecutive quarters. Yet influential economist Simon Kuznets, who helped the U.S. Department of Commerce standardize the measurement of GNP during the 1930s, knew that GNP is hardly an indicator of the well-being of the nation.
Far more important are the human costs of economic cycles. With the unemployment rate at about 10 percent, the situation has been especially hard felt for workers and their families. As the saying goes, when your neighbor loses his job, it is a recession, but when YOU lose your job, it is a depression.
How businesses respond
With the onset of a recession, managers often react by severely cutting back on orders for raw material and supplies, fearing that gloomy sales figures for the next quarter will lead to bloated inventories and financial losses. Austerity measures such as reduced orders can deepen a recession.
Yet the economic performance that results from inventory-cutting measures at many firms is often shortsighted. In recent recessions, many firms have fared less badly than initially forecast. Economic contractions in recent years have been relatively short; after a few quarters, companies find that they need to resume spending to replace necessary supplies.
The problem with reflexive responses is that these cycles can vary considerably and change consumer buying patterns. Each recession affects businesses in distinctly different ways, and no recession is quite the same as the preceding one. So while local jewelry stores may be hurting for customers, secondhand stores and shoe repair shops gain business as customers try to economize and stretch their savings. One sign of the seriousness of the recent recession is that the auto repossession business has been booming. (1)
Some assume that food and beverage companies may have a degree of immunity to business cycles since food is a necessity. But sales revenues for food businesses may vary for reasons that are difficult to predict because, for instance, eating trends have changed with increased nutritional education. It can be difficult for any manager to forecast sales even for the following quarter.
Sales depend on both the type of products being sold and the type of customer doing the buying. To understand how to raise sales revenues, there still remains no better marketing maxim than "know thy customer."
Granting this central principle, recessions can offer interesting opportunities to marketers. Researchers have cited companies such as Dell, Microsoft, De Beers, and BMW as firms that view recessions as opportunities to expand rather than scale back. In short, the occasion of a recession may call for a particularly aggressive and well-crafted marketing program to counter the pessimism attributed to the hard times. (2) The caveat is that not all firms should respond in such a proactive manner; firms need to be prepared by spending their efforts (and promotional dollars) on carefully targeted groups of customers.
In recessions most firms commonly cut back on all unnecessary expenses, and this means reducing their advertising expenditures. Advertising rates then drop. It may be no surprise, though, that marketing consultants advise firms to go ahead and advertise, since managers can negotiate media deals at dramatically lower rates. But in fact, only well-financed companies usually exploit these opportunities (as Mercedes-Benz is doing right now). Smart firms increase promotions very selectively in advertising media, building the value of their brands for the long term. During the Great Depression in the 1930s, Procter & Gamble heavily promoted Camay, Ivory, Crisco, and other brands. …