Sunday, March 6, 2011

Essay on Recession

Essay on Recession

Recession the word signals declining sales, mounting inventories, declining margins, employees demotivation, uncertainty of cash flows. The obvious measures like across-the-board cost cutting often end up destroying value. It is those who can look beyond the obvious (and often erroneous) who emerge as winners. This paper looks at how marketing in recessionary times is different from the boom times and needs to be adaptive in the changed circumstances.

Firstly we will develop the perspectives for marketing in recession. We will then present how marketing is to be adapted to the difficult times through Seven specific strategies. Our points have been adequately substantiated through the examples of various companies who have been noteworthy in adopting the strategies.

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The perspectives
Recession provides an opportunity for change and re-configuration. If we view market as a system of relationships, the recession upsets the existing balance in the system. This takes away the inertia in the existing configurations. This loss of inertia will enable one to reconfigure ones relative position in the market place.

The strategies outlined in the paper are a series of planned and proactive measures to undertake when recession strikes, and prepared in advance. It is not as if these strategies don’t work in non-recessionary times. They do, but they take a centre stage in a company’s strategy. It is not a string of knee-jerk reactions to short-term pressures on performance but a well thought-out and conscious strategic decision.

To begin with, let’s look at two major issues that completely change the consumer’s mindset in terms of needs fulfillment and buying behavior:

1) It might be useful to look at the essential needs of humans, to get an idea of what motivates humans to act, to change, or to buy products and services. Psychologist Abraham Maslow suggested that we each have a "needs hierarchy" which essentially tracks our life cycle from birth to maturity. Maslow has used a ladder analogy to picture this hierarchy because individuals are not motivated by the "higher" needs until the basic ones have been filled. On the other hand, all of the needs are recurring, so they are up and down the ladder quite a bit. What changes during recession is the relative importance of these individual needs. Consumers emphasize more on fulfilling their basic needs first instead of aspiring for fulfillment of higher order needs. This makes it imperative for any marketer to see if he can relate the major benefit of his product or service to one or more of these essential basic human needs. Then re-focus his marketing - his wording, his look, his positioning statement - so that it is clear just how he can help a person have his or her basic lower order needs met. “What psychological "button" does marketer’s message push to get the attention of those he can help” is the prime question required to be answered here.

2) The big brands become vulnerable during recessionary times. The external cause of vulnerability is in terms of mindshare of the customer. The customer questions the value of the offering and becomes particular about the marginal benefit of additional features of the product. She evaluates it in terms of its functionality and her need, assigning a high weightage to those features. This brings all products in the market close to one another than before in terms of their value in the mind of customer- even for the brand loyal customer. What is worth consideration during recession is that consumers place higher weightage to the core benefits & features related to the product instead of going after non-core attributes.

The weights given to different each of these attributes varies across segments. But in any segment, the weightage assigned to the core functional attributes ‘a, b and c’ increases and that of other attributes reduces, when the customer is apprehensive of spending. As a result the differential between a superior product and a basic product reduces. Specifically the products, which bank on non-core attributes and on brand name, will suffer the greatest value erosion in the mind of consumer. Everyone will be forced to compete on the same value proposition in spite of differing product features.

The above two issues thus imply that during recession, it becomes imperative for any marketer to adapt a strategy that provides an opportunity to unearth important consumer needs and serve them effectively. The customers become more critical in evaluating their purchase decisions. Hence a well-designed value proposition would not only break the existing loyalties and preferences but also create a lasting relationship in the mind of the consumer, with costs reduced due to lesser hurdles in breaking existing loyalties. The customer’s mind share gained today will reap revenue and market share for a long time in future.

All this calls for a totally different strategy where a marketer may have to walk on an uncharted path, say by altering the weights attached to product attributes, calling attention to neglected attributes with an aim to fulfill consumer’s unserved needs.

Keeping the above propositions in mind, we recommend the following strategies in order to make any business recession proof:

The Strategies
Concentrating on core customers
Concentrating on core customers entails identifying the most profitable customer segments, and redesigning the value propositions to serve them better. During a recession, these customers are most profitable. Unprofitable customer segments should be culled out as they consume disproportionate resources and destroy value. A major global brewer, for example, used a robust needs-based customer segmentation to define its brand strategy, but then reverted to aggregate measures (e.g., males 21 to 29) when building its spending plans for its largest brand – Brand A. As a result, its marketing failed to address two separate bottlenecks for two distinct customer segments. The product was not widely available in hip bars among the “vanguard” customer segment (which represented the largest economic potential), while the brand’s image was becoming too exclusive for customers among the brand’s other target segment, “frat boys.”

To identify which bottlenecks to tackle, it is helpful to (1) compare how well, versus the key competitor, the brand’s key segment customers are progressing from awareness through consideration and trial to loyalty, and (2) understand the profitability potential of these key segment customers. Competitive gaps along this customer decision funnel can be valued using simple assumptions.

Leverage the brand’s distinctive “drivers.” After you have used the bottleneck analysis to zero in on the greatest financial opportunity, you must identify the potential “brand drivers” that can remove the bottleneck. Brand drivers are attributes of the brand’s equity that are highly valued by customers and distinctive versus competitors. Focused spending on drivers leverages the brand’s differentiating attributes to remove bottlenecks and provides a sustainable means of growing profitability. When attempting to remove a bottleneck, a marketer will get the greatest leverage from every dollar spent if the plans are built on a foundation of brand drivers (i.e., the brand attribute that, if enhanced, is most likely to improve overall brand preference).

Concentrate on Power Brand
Concentrating on key profitable brands in the company’s product mix helps it to hive off unnecessary costs incurred in supporting a weak brand in terms of promotion and distribution. It prevents the stronger brands from being pulled down and allows the company to focus on profitable brands. HLL has selected 30 successful ‘power’ brands to aggressively promote and extract value from.

Says M.S.Banga, CEO HLL, “Power brands, comprising 30 specific products and brands, contribute about 80 per cent to the total revenues of the company. It made sense for us to concentrate on these products and extract more out of them. The idea is to increase profitability and not merely profits and sales.”

HLL has increased expenditure on advertising by 30 per cent in the second quarter of last year to popularize its power brands. This reflected directly on the sales. Personal products segment grew 12.8 per cent, spearheaded by a 24-per cent rise in the sales of shampoo. Surpassing market expectations, HLL posted a 7-per cent topline growth and a 14-per cent bottomline growth for the quarter ended 30 September 2001. Even though the FMCG sector has seen hardly any growth in the current year but the power brands continue to dominate their respective categories and show impressive results.

Identifying Unsatiated needs of Consumers in a product category
Product-market segments should be chosen keeping in view the aggressive stance being aimed at. The segments to be targeted are those where the firm already has a toehold but the current share is relatively low, competitors are weak and not likely to retaliate fast, the size of the segment’s profit pool is still large and where incremental efforts and investments will lead to disproportionate payoffs. Similarly, for making a low-cost, rapid entry into a new business area, product-market segments should be so chosen where opportunities exist to use currently under-exploited capabilities and resources and where options are available to make a low-cost, rapid entry through, say, Mergers & Acquisitions. During an economic slowdown, it is not unusual to find many opportunities of such a kind, and organizations aiming for rapid growth should perceive an economic slowdown as an opportunity to acquire high-quality assets or businesses which are badly managed by existing management groups.

FMCG major, Hindustan Lever Limited (HLL), decided to storm the hair colour market, currently dominated by L'Oreal. HLL launched its Sunsilk pro-Colour range of seven exciting hair colours. The USP, as claimed by the company, is that the product is specially suited for the dark Indian hair and skin tones. Having established a high market share with the Sunsilk brand in the beauty shampoo market, HLL is extending this brand on to its new product range, given the association with haircare and beauty.

At the same time the leading brands have to be alert and should not take pre-recession equations for granted. They might reinvent their value proposition to strengthen their leadership. The falling prices provide an opportunity to undertake capital projects and launch campaigns at relatively lower prices. During the last recession, Intel was able to get a chip-fabrication plant built at a very favorable price and initiated the `Intel Inside'' marketing campaign. It finally ended with dramatically high profits.

Focused advertising and promotions
The promotion has to be more focused today, in terms of content and target, for a number of reasons. First, the fragmentation of media channels is occurring at a rate faster than media spending. This means more focused advertising is needed to make it really relevant to the target audience and making it cost effective. Second, for premium customers, the snob value of a premium product goes up because of the economic spending around. Hence a well-targeted promotion is likely to be more successful, provided you have chosen your customers carefully. Third, although the advertising costs have gone down, the incidence to purchase has plummeted further for most products, making advertising cost ineffective. Hence when targeting the non-premium buyers, the stress should be on offering more tangible benefits to increasing the incidence of purchase. The reason is that the value-demanding buyer would buy a product more because of what it delivers in terms of price/cost rather than how he feels about the product or so. But between advertising and promotions, one has to choose more of promotions. Brand building will be taken care of some level of advertising and building the product value.

Recession is the ideal time for the deals and promotions. They can offer more value to the customer, and also enable the organizations to bounce back to their original prices once the expediency has passed. We refer to the example of The Taj Group of hotels with has given a bundle of extra benefits at no extra costs to attract tourists. The Taj group has over the past year made a conscious decision to focus on the domestic traveler. “Many Indians plan just one holiday a year. With our attractive holiday packages, we are making it easier for them take more holidays,” says Jamshed Daboo, chief operating officer of the Taj’s leisure hotels. The Taj’s leisure hotels division has laid out a slew of offers and vacation packages that will gladden the heart of any traveler. “Normally we would not have such offers during our prime business season; this is essentially because of the crisis. Our offers are not discounts as much as value additions. We are giving more for the same amount.” On offer are special winter holiday tours, value-added packages and a distinctive scheme for singles.

Aggressive Marketing
During an economic slowdown characterized by depressed sentiments, conservatism and risk-aversion among consumers, firms and investors at large, firms having a long-term strategic intent to build market power will find the aggressive stance as the best mode to achieve their objective. As the rest of the firms of the industry become risk-averse to undertaking new initiatives, follow a wait-and-watch policy (a symptom of pessimism and conservatism), take defensive stances and go on the back foot to consolidate the current position, aggressive firms will see the slowdown as an opportunity and invest in new products, markets, capabilities and value propositions when the rest of the industry is cutting back in these areas.

Recession, is a time of easy pickings for the astute marketer. Just as Black Tuesday was an opportunity for the smart investor to pick up great stocks at throw away prices. Because competitors spend less, it is possible to increase share of voice even by maintaining advertising spending. As advertising budgets crumble, advertising rates soften. So, maintaining advertising spend on the brand would mean increased advertising exposure. TV viewing habits also change during a downturn. Consumers adopt a “fortress mentality” and tend to stay at home and watch TV. News program ratings go up. So, with an identical media plan, audience delivery is likely to be higher during a crisis.

Figure1 shows that those who cut advertising tended to have better profitability during the recession. This is to be expected, because the saving in advertising expenditure went straight into the bottom line of these companies during the recession year. However, the picture changes when you look at Figures 2, which pertain to the phase of recovery. During recovery phase the companies that increase ad spending came out as winners both in terms of profitability and market shares. This study proves conclusively that increasing communication during recession will yield long-term dividend in terms of profitability and market shares - the two key indicators of brand building.

Keep the advertisements you know are already working but also find new media for inexpensive advertising, such as directories, classified ads...even bulletin boards and car windshields. This may be the time to start your e-mail newsletter, if many of your clients are online. Reach people in their homes and businesses with well-written, carefully targeted sales letters, postcards, self-mailers, newsletters and event flyers. For e.g. in an e-business situation a concept of Affiliate Marketing i.e. a program where a merchant pays a commission to an affiliate for generating clicks, leads, or sales from a graphic or text link located on the affiliate's site. It leads to a Win - Win Situation where the merchants gain desired actions or consumer sales and the Affiliates earn money.

Brand acquisitions and product extensions
Recession provides a reason as well as an opportunity to extend the product line or fill up the product portfolio or to gain market share. In the pursuit of offering a new value proposition, new product mixes can be created. This will complete the product portfolio and enable the organization to cater to different customer groups thus enlarging its net. It is the opportune time for acquiring brands. Acquiring brands can help in completing ones product portfolio, or build market share through access to new regions or new products.

Given the pressure on income, some lower end consumers would be forced to downgrade to cheaper alternatives. It is an opportunity to launch a value brand. Companies who add a cheaper value brand to their portfolio during a recession manage to keep most of the down-trading consumers within their fold. Unilever launched a value detergent brand (named Surf) in Indonesia during recession and managed to build a brand with 13% market share within two years. In Thailand a new beer called Chang was successfully launched during the recession. It was a good quality beer at half the price of the market leader.

For firms planning growth through entry into new areas, an acquisition-led entry strategy will be the logical route to build a toehold in the new segment(s). Once the entry has been made, the right approach will include exploiting all possible synergies that can be achieved between the assets of existing businesses and those available with the newly acquired unit

Building brand image and loyalty
“Building customer loyalty is not a way out of recession but it’s a way back to better than normal prosperity”. Like a friend in need, an organization should address the customer needs in the time of recession by cutting costs or offering higher value. Again, the Taj group of hotels, by offering a slew of extra benefits along with its standard package at no extra cost, intends to do just that, while the Singapore Airlines has successfully repositioned itself as the airline of choice for its most profitable customers with its services to them.

Reactivating the Dormant clients
Going through the card files, address book or cancelled account list and phoning or sending a letter to former clients to let them know of new products or services added that could be of help to them are small but effective ways of creating brand loyalty. A disciplined marketing approach helps people in need find the company when they need it.

Another way to reactivate dormant accounts is through Referrals. These are a tremendous source of additional sales. Writing to all existing clients offering them an incentive or special discount for introducing people to business or practice may increase the number of referred business. Better yet, offering the new, introduced clients a special not-available, any-other-time deal will increase the response. Special events like celebration lunch, free seminar, etc. are endless opportunities to maintain the existing customer base and even reactivating dormant clients.

The entire argument is based upon the concept of Relationship Marketing where the customer treated as a partner in the organization’s activities and value is created through a long-term relationship. For e.g. Harley Davidson offers free one year membership to first time buyers which includes benefits like discount hotel rates, theft reward service, special insurance program, etc.

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