Monday, 13 April 2009

marketing during an economic boom & disposable income sensitity tests

Price sensitivity tests must be accompanied by disposable income sensitivity tests as marketing teams develop the business case for launching new products.

Ok, this comment may sound very eccentric. We can't put a fix on it, but we think the logic is correct. We will continue to work on it.

"Marketing in a recession. Sales in a recession. HR in a recession." We are reading these headlines everyday. Prominent management gurus giving their inputs on how to maximise shareholder value in a recession/ downturn when consumers and employees lack confidence. We dont dispute most of these writings, except the ones that advice management to "re-look" pricing and make pricing "more attractive" (read discounts/ bulk deals etc) in a downturn.

Our take is this. Marketers should be as careful of how they market in a "boom" as they are in a "bust". More so in a boom, because these phases of expansions set up expectations (over optimistic) of the success of a brand or marketing approach. Fundamentally, does economic health determine how good a product is functioning?

-Was a Porsche a better car in 2007 than today?
-Is my Axe effect any less now than last year?
- Are the Himalayas any less beautiful today than 2 years ago?

A brand is a promise of a product/ service experience. It is based on a product and its differentiation (or lack of it). If the promise is maintained and communicated/ delivered over time, the brand becomes a signal. Fine.

Why then do consumers opt in and opt out of products, often siting economic conditions as the key. We believe that the value proposition of these consumer changes. In a boom cycle, the consumer feels richer and freer to purchase certain products which seem "an indulgence" when money is tighter. These are risky consumers and marketers must identify them early. Hence price sensitivity must be in conjunction with disposable income sensitivity to a product.

These fickle consumers will cause sales to rise during an expansionary period and decline during a recessionary period. This means that factories produce more when demand is higher, and less when it is lower.

Profits will rise in a boom, and fall in a bust. The number of consumer rises in a boom, and falls in a bust. This should not be surprising to a company. But it often is.

In fact, if the marketing processes included a sensitivity simulation of the economy on future purchases, all of these swings would be built into the business model for a new product.

1. The marketing team must start with a definition of the "core consumer" set for a product. The people for whom the product is an essential part of life.

2.Then identify Identify how sensitive the customer to a change in his disposal income. Not price sensitivity. But income sensitivity. What happens when the consumers income falls be 15%, 30%, 50%. This is a critical lesson for us from the current business environment.

3. What this will mean is that the business has identified a "economy independent" set of consumers around which its business is to be built. any new consumers in a "boom" should be taken as a bonus, and these earnings set aside in a war chest.

Any decline of consumers in the "bust" should be offset not by lowering pricing and inflating demand, but by digging into the war chest to continue R&D and marketing expenses in a low volume environment. (A sort of "oil surplus fund" that Russia created some years ago, to put aside its oil surpluses for a rainy day.)

Why should a business not work that way?

Adjust production to changes in the "peripheral" consumer set that a brand has attracted, but be focused on the core group. Pricing has no significant role to play in a recession. At least no more significant than during an expansion.

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