It’s all down to strategy : businesses and the recession

 With the recession biting deeper this year  companies had to deal with the downturn in demand for their products and services.

How accompany reacts in a recession can make or break them .Some take the head in the sand attitude preserve the status quo and hope for the best, others seek to cut costs across the board. Neither approach is likely to achieve the best results.

The companies that can anticipate changing customer behaviour react to it correctly and increase efficiencies within their organisation to position themselves for a return of growth are the ones that come out of a recession the fastest.

Changing customer behaviour
Consumers are very flexible at responding to an economic downturn. Even if their own disposable household income does not change, heightened uncertainty means consumers are inclined to postpone the purchase of larger items and spend less on those products that they do buy.

In addition purchase decisions during a recession will also reflect a change in consumer preference and behaviour.

Harvard marketing professor John Quelch described these changes in a Harvard Publishing article:

“When economic hard times loom, we tend to retreat to our village. Look for cozy hearth-and-home family scenes in advertising to replace images of extreme sports, adventure and rugged individualism. Zany humour and appeals on the basis of fear are out,” he writes.

“Greeting card sales, telephone use and discretionary spending on home furnishings and home entertainment will hold up well, as uncertainty prompts us to stay at home but also stay connected with family and friends.”

In accordance with Quelch’s theory, dining out is one of the first things customers tend to cut when the economy weakens. American consumers, for instance, increasingly went to McDonald’s as a cheap alternative to sit-down meals in mid-price restaurants.

When consumers cut back like this it  poses  real challenges for companies in terms of pricing, choosing the right product mix and marketing.

Take pricing. When times are tough, the costs of products and services becomes much more of an issue than it normally would be.

This benefits businesses that have a natural focus on low prices such as budget retailers (eg WalMart or ALDI), budget fashion stores (eg H&M, ZARA, Primark) or fast food restaurants.

In contrast businesses that emphasise quality need to respond to the price-sensitivity of their customers and clients.

This can be tricky. While price increases are hard to justify in a downturn, prices that are lowered too far may be hard to reverse and could reflect on the image of the product or service when the economy picks up again.

Businesses that have difficulty in lowering their prices, for example those that face rising commodity prices or other business costs in addition to the economic downturn, alternatively have to try to add value to their products and services.

Identifying customer trends
To get an accurate idea of how and when consumer behaviour and spending patterns change during a recession, companies will examine statistical data of customer buying patterns on weekly or monthly basis, whereas they might have analysed this type of information only twice a year before.

Pricing needs to become more flexible, often on a story by store basis across chains to more accurately reflect the purchasing power and willingness in specific areas.

Diversifying the product mix
However, pricing is not everything. Generally companies that are able to shift their product mix in response to customer demand will be better off during a recession.

McDonalds managed to outperform many of its US competitors. On the one hand the company emphasised the value of its fast food offering with breakfast for a dollar and other reduced price offering. But McDonalds also broadened the menu with more chicken, beverage and breakfast items and a brought in a new initiative adding lattes, cappuccinos and other coffee drinks.

The wider product range helped the company to grow despite the recession.

Of course it depends on the type of business you are in and how quickly you can react. The US car manufacturers faced difficult times because they were unable to change the models they sold quickly enough to respond to respond to higher demand for small fuel efficient compact cars. Their only option was to offer steep price cuts to respond to a change in customer demand.

On the other hand businesses with a diverse mix of products and suppliers who have the opportunity to change the products they sell according to demand, such as supermarkets, are in a much more flexible position to cope with the economic crisis.

TESCO a large supermarket retailer in the UK and WalMart are such examples. Both companies posted massive profits during the recession, when other companies retrenched. While WalMart already had a focus on low prices, TESCO needed to be flexible in its marketing efforts and emphasise its ability to help customers with their tighter budget.

More marketing not less
TESCO’s example highlights the importance of marketing to appeal to a change in customer sentiment in a recession.

Although perhaps counterintuitive, it is also often right to increase advertising or marketing spend and effort when times are slow.

Making an extra effort to win new customers is essential. It may take customers from competitors who cut advertising expenditures as part of cost cutting strategy.

But that strategy could be counterproductive in the long-term.  Businesses that increase advertising during a recession, when competitors are cutting back , have in the past shown and improved market share and return on investment during economic boom times.

Customer Service
More than ever during a recession more attention to customer trends should also translate into outstanding customer service.

When winning new customers becomes more difficult, it is imperative for companies to keep the customers they do have. As clients and customers expect more for their money, businesses have to find ways of providing additional value. Excellent customer service is often the easiest way to do this.

Refining customer service strategies by offering faster delivery, wider product and service ranges or more flexible payment terms have all been used as strategies during the recession.