Maintaining volume during economic downturns

Maintaining volume during economic downturns

Article Type: Marketing developments From: Journal of Consumer Marketing, Volume 27, Issue 1

Edited by Dennis A. PittaUniversity of Baltimore

As this column is being written, most nations around the world are debating how to get their economies back into gear. Much of the debate centers around the issue of interest rates and their effect on inflation. With world interest rates sitting at record lows for most of a year, central banks are concerned about a surge of inflation and plan moves to avoid it. In contrast, many governments are opposed to any anti-inflationary action, like raising rates now, that will push their economies into recession. The fear is real. Historical attempts to head off inflation by rate hikes have sometimes generated double digit recessions. While the positive effects of government intervention are manifest, calibrating those efforts to yield the best results has become important. The current debate in the USA has turned decidedly partisan and sharp. Fortunately, marketers have already acted to boost the economy while reining inflation.

Businesses and marketers work with a different operational model than governments. The conventional wisdom is that during a recession, marketers spend more on advertising, reduce the price of their offerings, unbundle products to make them more affordable, and lessen their emphasis on profitability. Arguably, none of these moves would directly boost inflation. In contrast, lower prices tend to reduce inflation. So, what marketers’ actions benefit their economies?

Retailers, like Wal-Mart in the USA, have reacted to the economic downturn proactively. They have cut prices to remain competitive and fight for market share. That action is risky. Often businesses adopt significant price cuts to stay afloat. Coincidently, they erode profits, may dilute the power of the brand and potentially may diminish consumer confidence in the company. By itself, dramatic discounting may signal weakness rather than a well-considered attempt to compete. It is a risk that can be managed if marketers do their jobs correctly.

Professor James Kucher, director of the Entrepreneurship Opportunity Center, at the University of Baltimore, notes that the severity of the recession has made consumers highly value conscious. He cites examples in the fast food industry in which overt advertising focusing on price or quantity for a price, has become so ubiquitous that the ads refer to value explicitly. Consumers can find value meals in outlets as diverse as McDonald’s and more sophisticated sit down chain restaurants like The Olive Garden as well as independent outlets. In principle, reducing price usually reduces profits. However, marketers can use a variety of strategies to offer value without necessarily trimming their bottom line.

There are a number of strategies marketers are using effectively.

Focus on price-based promotions like coupons

Companies in this economy need immediate boosts. Thus, promotional efforts like advertising product value or using coupons to spur sales become more important. In fact, coupons have become popular again. Customers seek the savings coupons provide on products that customers need. Traditional retailers, especially food retailers have relied on coupons for years. In the last few years, advances in information technology have spawned the use of customer discount cards. Consumers use them to obtain discounts on their purchases and simultaneously enable food retailers to record specific purchases the customer makes. As a result, retailers can offer point of purchase coupons aimed at brand switching or repeat purchases.

Today’s hard economic times have forced a resurgence of coupons. Coupon redemption rose 19 per cent in the USA in the first half of 2009 versus the same period of 2008. Overall, the number of coupons issued increased 12 per cent (Zimmerman, 2009). In fact, even the outlets that have reaped profits from hard times, the large discount clubs like Sam’s Club and Costco, have started issuing their own store coupons. In fact, Sam’s Club, Wal-Mart’s warehouse chain, reversed its policy of not offering coupons. Recognizing the rigors of the economy, the company started offering coupons to selected classes of members. They can print them electronically at home, or use in-store kiosks. Coupons are redeemed directly at checkout. Most important, the coupons have a limited lifetime, avoiding the effects of long term changes in industry product costs.

Offer more for the same price

The value pricing trend has spread widely in numerous dining outlets. Terms such as value meals, endless, bottomless, all you can eat, and others clutter advertising as chains and independent restaurants strive to attract customers. Two recent examples, Red Lobster restaurants’ “Endless shrimp” for $15.99, and Olive Garden’s “Never ending pasta bowl” for $8.95 are just a few of many attempts to lure diners. The risk here is that currently, these price deals come during a peak for commodity prices. If diners indeed eat more, the potential for profit erosion is clear. However, industry experts note that overall, diners opting for the all you can eat option, tend not to eat all they can. They tend to eat what they would have without the deal, saving retailers significant money. In fact, few diners eat enough to become unprofitable (Ziobro, 2008). Experts note that dangers may still lurk and cite the near disastrous deal that Red Lobster tried in 2003. They offered an “Endless crab” promotion priced at $20. They suffered two effects that combined into their own perfect storm. First, they badly miscalculated how many times people would refill their plates. Second, crab prices rose sharply. The combination led to significant losses.

The industry has learned its lesson. The current focus is on inexpensive ingredients like pasta, that are easy to make. Moreover, these limited time offers diffuse the problems that traditional coupons with longer lifetimes brought. Since the emphasis is on “limited time,” the hope is that diners do not expect indefinite deals.

Offer less expensive products

The classic example is the increase in beer sales and decrease in hard alcohol sales during North American recessions. Consumers try to satisfy their wants but have to trade down to do so. Ikea Group is a prime example of a low cost alternative’s attractiveness in a down economy. Last February, Ikea opened its Charlotte, NC store with the expectation that the economy would be its ally in competition. Ikea, known for low cost – value – furniture, calculates that shoppers will still have needs for furniture but will desert its high price competitors for its well known brand. When the price difference is great enough, consumers will tackle the challenge of “assembling it yourself.”

Even design professionals are warming to Ikea’s product line. Many have learned that the price savings benefit them and their customers. By offering designs that use Ikea products, customers save money and the value the designers deliver, increases.

Change the product/service mix

Ikea serves as a good example of how changing the product service mix can aid marketers today. Ikea’s furniture is unabashedly inexpensive, with reasonable durability and measurable style. One drawback to customers is the need to assemble the items. The old joke about assembly focused around Christmas. The typical parent would buy children items that required, “some assembly.” That phrase became the nightmare scenario as parents found missing pieces, incomprehensible assembly instructions, or even complete lack of instructions. At the time there was no telephone technical help on Christmas Eve.

Today, Ikea’s assembly is not the challenge it might once have been. The newer stores offer home assembly and delivery services that increase customer convenience as well as the derived quality of its products. Consumers can shop the store and find items arranged in attractive displays that convey some of the style and some of the interior designs possible. There is an increased availability of design aid for kitchen remodeling which capitalizes on product line strengths and can be very economical (Lloyd, 2009).

Overall, these and other marketing techniques are helping countries refresh their economies while reducing the threat of inflation.