Marketing in a recession
Last month it was made official. Eurostat statistics released confirmed that Malta officially entered into a recession at the end of last year. Malta effectively registered a negative growth of one per cent in the last quarter of last year, following...
Last month it was made official. Eurostat statistics released confirmed that Malta officially entered into a recession at the end of last year.
Malta effectively registered a negative growth of one per cent in the last quarter of last year, following a first contraction of 0.3 per cent during the third quarter. A recession is defined by economists as two consecutive quarters of negative growth.
The recession changes the business landscape in which companies operate and you all need to be aware of changing consumer behaviour as well as a likely change in your competitors' strategies. I am sure everyone will agree that the typical response in a downturn is that consumers identify stricter priorities and reduce their spending while companies cut costs, reduce their prices and postpone new investments.
One CEO of a local publicly quoted company recently told me: "The first things to cut in a recession are the budgets for marketing, training and development and Capex". I was stunned, to say the least. Marketing in a boom economy is different to marketing in recession but you certainly don't slash your marketing budgets and you shouldn't engage in price discounting however counterintuitive this may sound.
First, and according to the highly respected global consultancy firm McKinsey & Co., it is calculated that a one per cent reduction in price typically produces an 11 per cent reduction in profit. McKinsey & Co. also calculated that a one per cent price-cut needs a 3.5 per cent increase in volume to maintain profits. Few markets respond this well!
Unless your business strategy is to be the low-cost leader in your respective industry (and there can be only one low-cost leader) you need to differentiate yourself in the market by focusing, for example, on the customer experience you are delivering or perhaps on your product range and offering. Second,
and perhaps more relevant to this article, businesses need to employ a different customer segmentation approach.
True, the recession in Malta is mild compared to that currently experienced in the UK or the US, but the same logic applies. Whereas before (in the boom times) it made sense to segment according to demographics or lifestyle it now is more appropriate to employ psychological segmentation that takes into account consumers' emotional reactions to the grim economic environment.
As a side point, I would like to compliment Deloitte Malta for their excellent and timely Business Sentiment Survey which confirms that most businesses are concerned about how the recession is impacting their industry. Business research from Harvard Business School shows that consumers in a recessionary environment typically prioritise their consumption by sorting products and services into four categories, namely: "essentials", "treats", "postponables" and "unnecessary / unjustifiable".
Therefore, a psychographic segmentation approach is far more useful than traditional techniques (e.g. "over 40", "new parent", "low income", etc). This same research suggests that it makes far more sense to think of your customers as falling into four groups: "Emergency brake segment",(these are the hardest hit financially), "go slow segment" (they economise in most areas but less aggressively), "drive slower segment" (retain same consumer behaviour as before but are just more selective and less conspicuous) and "reckless joy rider segment" (carries on as usual, unconcerned about savings and will spend as in pre-recession so long they have an income).
The fact is that all consumers, except for the "reckless joy rider", re-evaluate their consumption priorities. So eating-out, travel and buying new clothing shift in consumers' minds from "essentials" to "treats", "postponables" or even "unnecessary / unjustifiable". It is important that businesses understand this change of mind by consumers so as to be able to more effectively market their products and services.
Otherwise, sales will go down and your cost base will have to be trimmed down but a competitor which retains pre-recession marketing spend and adopts a more appropriate psychographic segmentation approach, as described above, stands a far better chance of maintaining market share in a recession (and probably at your expense).
Expert opinion (Joez & Quelch: 2009) prescribes that in a recession it is more important than ever to take care of your loyal customers, since they guarantee your source of cash flow and organic growth in tough business conditions. Marketing isn't optional in a recession - it is a "good cost" essential to bringing in vital revenues. Your business strategy and opportunities will strongly depend on which of the four segments your core customers belong to and how they categorise your products and/or services.
It is for this reason that you urgently need to adopt a different and more appropriate segmentation approach so as to better understand your customers.
I recently heard a fellow business consultant say that "marketing is muscle, not fat, so be extra-careful about cutting into it". Just as the savviest investors and entrepreneurs perceive recessions as a time to buy when everybody is selling (John D. Rockefeller's quote comes to mind, "The way to make money is to buy when blood is running in the streets"), the savviest marketers know recessions are great times to pick up market share and this doesn't just apply to businesses but also countries such as the Malta Tourism Authority and FinanceMalta.
By maintaining your budgets or even increasing them, you can pick up market share that will pay off in the long run. To quote another phrase I recently came across: "Marketing in a recession is like oxygen on Mt Everest". The point being that the less there is in the surrounding environment, the more valuable the amount you pump in becomes. Lastly, as the market tightens up (and that's the impression I am getting from various sources) the best positioned players with the savviest marketing strategy will survive and thrive.
http://www.fenci.eu
• Mr Fenech is a partner at Fenci Consulting.
Malta effectively registered a negative growth of one per cent in the last quarter of last year, following a first contraction of 0.3 per cent during the third quarter. A recession is defined by economists as two consecutive quarters of negative growth.
The recession changes the business landscape in which companies operate and you all need to be aware of changing consumer behaviour as well as a likely change in your competitors' strategies. I am sure everyone will agree that the typical response in a downturn is that consumers identify stricter priorities and reduce their spending while companies cut costs, reduce their prices and postpone new investments.
One CEO of a local publicly quoted company recently told me: "The first things to cut in a recession are the budgets for marketing, training and development and Capex". I was stunned, to say the least. Marketing in a boom economy is different to marketing in recession but you certainly don't slash your marketing budgets and you shouldn't engage in price discounting however counterintuitive this may sound.
First, and according to the highly respected global consultancy firm McKinsey & Co., it is calculated that a one per cent reduction in price typically produces an 11 per cent reduction in profit. McKinsey & Co. also calculated that a one per cent price-cut needs a 3.5 per cent increase in volume to maintain profits. Few markets respond this well!
Unless your business strategy is to be the low-cost leader in your respective industry (and there can be only one low-cost leader) you need to differentiate yourself in the market by focusing, for example, on the customer experience you are delivering or perhaps on your product range and offering. Second,
and perhaps more relevant to this article, businesses need to employ a different customer segmentation approach.
True, the recession in Malta is mild compared to that currently experienced in the UK or the US, but the same logic applies. Whereas before (in the boom times) it made sense to segment according to demographics or lifestyle it now is more appropriate to employ psychological segmentation that takes into account consumers' emotional reactions to the grim economic environment.
As a side point, I would like to compliment Deloitte Malta for their excellent and timely Business Sentiment Survey which confirms that most businesses are concerned about how the recession is impacting their industry. Business research from Harvard Business School shows that consumers in a recessionary environment typically prioritise their consumption by sorting products and services into four categories, namely: "essentials", "treats", "postponables" and "unnecessary / unjustifiable".
Therefore, a psychographic segmentation approach is far more useful than traditional techniques (e.g. "over 40", "new parent", "low income", etc). This same research suggests that it makes far more sense to think of your customers as falling into four groups: "Emergency brake segment",(these are the hardest hit financially), "go slow segment" (they economise in most areas but less aggressively), "drive slower segment" (retain same consumer behaviour as before but are just more selective and less conspicuous) and "reckless joy rider segment" (carries on as usual, unconcerned about savings and will spend as in pre-recession so long they have an income).
The fact is that all consumers, except for the "reckless joy rider", re-evaluate their consumption priorities. So eating-out, travel and buying new clothing shift in consumers' minds from "essentials" to "treats", "postponables" or even "unnecessary / unjustifiable". It is important that businesses understand this change of mind by consumers so as to be able to more effectively market their products and services.
Otherwise, sales will go down and your cost base will have to be trimmed down but a competitor which retains pre-recession marketing spend and adopts a more appropriate psychographic segmentation approach, as described above, stands a far better chance of maintaining market share in a recession (and probably at your expense).
Expert opinion (Joez & Quelch: 2009) prescribes that in a recession it is more important than ever to take care of your loyal customers, since they guarantee your source of cash flow and organic growth in tough business conditions. Marketing isn't optional in a recession - it is a "good cost" essential to bringing in vital revenues. Your business strategy and opportunities will strongly depend on which of the four segments your core customers belong to and how they categorise your products and/or services.
It is for this reason that you urgently need to adopt a different and more appropriate segmentation approach so as to better understand your customers.
I recently heard a fellow business consultant say that "marketing is muscle, not fat, so be extra-careful about cutting into it". Just as the savviest investors and entrepreneurs perceive recessions as a time to buy when everybody is selling (John D. Rockefeller's quote comes to mind, "The way to make money is to buy when blood is running in the streets"), the savviest marketers know recessions are great times to pick up market share and this doesn't just apply to businesses but also countries such as the Malta Tourism Authority and FinanceMalta.
By maintaining your budgets or even increasing them, you can pick up market share that will pay off in the long run. To quote another phrase I recently came across: "Marketing in a recession is like oxygen on Mt Everest". The point being that the less there is in the surrounding environment, the more valuable the amount you pump in becomes. Lastly, as the market tightens up (and that's the impression I am getting from various sources) the best positioned players with the savviest marketing strategy will survive and thrive.
http://www.fenci.eu
• Mr Fenech is a partner at Fenci Consulting.