Principles of marketing

ABSTRACT

The principles of marketing are immune to the prevailing economic environment; it is the practice and application of these principles which changes, especially in a recession. To counter the decrease in demand and sales, many organizations cut back on their marketing budget and resources. These challenges, along with volatility of market place and ever changing customer need, have imposed a major problem to the marketing teams to decide which strategy needs to be deployed.

Every marketing strategy used is aimed at providing a return of investment. There are various factors which influence the decision of a particular marketing strategy for a company, like overall objective of the strategy, the level of available human and financial resources for implementation, the geographical scope and elasticity of demand in the marketplace, to name a few.

This paper highlights the strategic reaction to recession by an organization. Many marketing strategies are discussed with special emphasis on the effectiveness of a strategy in time of economic crisis.

INTRODUCTION

A recession is the decline in a country’s Gross Domestic Product (GDP) growth for two or more consecutive quarters in a year. A recession is also preceded by several quarters of slowing down. The defaults on sub-prime mortgages (home loan defaults) had led to a major economic crisis in US. The ripple effect could be felt all over the world and led to global recession majorly affecting Europe and rest of the world. Though the affect was cushioned by the economic policies adopted by India but still the effect could be felt in demand and prices.

The above statistics show the dimension of the effect of recession on companies globally.

Demand dropped in almost all the global markets. Suppliers were led to decrease prices drastically, Immense focus developed on price and profit margins of organizations declined. Thus, with negative sentiments of downfall among the organizations led to a panic reaction of reduction of budget, especially the marketing budget, to counter the downfall.

• Marketing budgets were cut over 20% on average in 2009 versus pre-recessionary levels in 2007/2008.
• The number of companies that cut marketing budgets in 2009 is 25% higher than predicted in January 2009.
• In one survey less than 20% of companies are expecting marketing budget increases while over 40% are expecting further reductions in 2010. (The Marketing Mélange)

Why is marketing feeling the effect of budget squeeze so immensely, when the need of marketing is even more to meet customer requirements and fulfill their demands? In general, a business loses half its customers in 5 years, it is frightening to think how many customer would businesses have lost in past few months as a result of economic crisis. It is even more important for businesses with low customer base to retain their customers as they form the major lifeline for such businesses.

Marketing is a means which can profitably fulfill the needs of the customers, help retain customers and attract new customers. The companies that achieve success in time of economic recession are those which adopt effective marketing strategies affectively but the decision to adopt a particular strategy is the hard part. Many businesses are eluded by the fact that dropping prices is the way to go in recession but in doing so they neglect the marketing mix, deteriorate brand image and neglect the customer needs. In some strong economies, the economy may buffer the effect of recession to some extent and lead businesses to thing that their strategies are working. But they don’t understand the importance of marketing strategies in achieving even more profitability and feel safe in the tumbling global economy. But a business can very rapidly fall in recession, thus bringing in the need of marketing strategy to provide risk insurance, making business less vulnerable to market volatility and provide potential opportunities.

With this in mind, this paper explores the role of marketing strategies in the time of recession. The paper highlights two main aims:

• How organizations are reacting to the economic crisis in terms of marketing strategies they have adopted.
• Which marketing strategies are most effective during economic crisis?

THE SIGNIFICANCE OF MARKETING STRATEGY

The major advantage of marketing in a business is that the marketing department has the ability to diagnose a corporate problem long before it is represented in the financial document, at which point it would be very hard to counter the problem. With the effective use of market research, marketers can recognize the company’s strengths, weaknesses, opportunities and threats before the economic crisis become significant. This enables the company to take corrective actions like developing a better strong hold in the market and developing proactive marketing strategies. Such actions will provide a support to the company to cushion the effect of recession and be prosperous and dominating in the market during adversity. Hence marketing strategy play an important role in the prosperity of the company.

Samli’s input/output model of strategic symptomatology depicts that factors in the external environment called ‘external uncontrollables’ (Samli, 1991) direct the strategic planning of the company and the strategic options are reviewed with reference to present market scenario and all external influences. The indicators and symptoms of market impact can help in providing corrective action to the marketing inputs, such as products, brand and sales force, and providing a better base for strategy planning. The symptoms and indicators can thus provide a better forecasting of the market scenario and strengthen a company by providing immunity in time of recession.

INDICATORS/SYMPTOMS

SAMLI’S INPUT/OUTPUT MODEL OF STRATEGIC SYMPTOMATOLOGY

The direction of strategic planning is based on the aim and objectives of market strategy adopted by the company. A marketing strategy can be defined as a foundation which enables marketers to apply a process in order to achieve a profitable outcome. The major goals pursued by marketing strategies are:

• Elimination of problem: Finding an optimum solution for problems like reduction in sales and increase in competition.
• Strive for improvement: improvement in different factors like improvement in communication, etc.
• Benefit on opportunities: To gain maximum benefit from various opportunities like new markets, etc.

Though it may seem simple and weaknesses can be easy observed and various strategies suggested, their only handful of strategies that actually give the desired benefit.

A lot of strategies fail due to corporate politics, undefined goals, lack of control, and all these factors lead to distortion in the focus of the business unit. Thus to have optimum execution of the marketing strategy to gain maximum return on investment is a highly sophisticated task and the complexity increases even more in times of economic crisis.

Marketing strategies are not exclusive of existing economic scenario. The strategies which are used during time of economic boom can also be used during recession. Igor Ansoff stated four strategies which can be used by companies: marketing existing products in existing markets, marketing new products to existing markets, marketing existing products to new markets and marketing new products to new markets. All these different strategies can be used irrelevant of the economic scenario.

Changes in the economic scenario may lead companies to consider different strategy than the one being executed at present. Drying up of market, disappearance of niche can force companies to transform their marketing strategies. A company can face various challenges during recession or otherwise, so a coherent marketing strategy is required to deal with challenges and make the business prosperous.

STRATEGIC REACTION TO RECESSION

Businesses react to economic downturn in several ways. These ways are typical of the scenario and the usual strategy of large number of companies.

The ways which are usually adopted by companies is to try to keep working normally (Inertia), lowering of prices or cutting costs.

INERTIA

As stated by Samli, if a business acts in a non-active manner to recession, then it is not motivated to work against recession. It is not trying to counter the ill effects of recession and takes a fatalistic approach towards of not reacting to it and doing nothing. This approach hampers the business as a whole. It makes the company indifferent to the market of which customers are an eternal part. This ignorance may lead company to lose its customers to competition.

The demand decreases significantly in the time of recession also to achieve maximum profit, the competition increases three folds. If a company doesn’t react to the changes then it will be left behind in the race and may even lose its existence.

REDUCTION IN PRICES

Markets are price intensive during the time of recession. With very less demand and too many suppliers, it leads to an extreme competition scenario which leads to decrease in prices as the first reaction by business units to maintain their position in the market and counter the effects of recession.

Price rise is the best way to increase sales which is desirable during economic crisis. However, price rise is more of a tactical approach than a strategic approach. Fall in prices are closely followed by rise in prices which can be a dangerous situation for companies as the companies who cut prices know the elastic nature of the market towards price.

In cutting prices, company accepts that its market segment is price buyers. It means a company thinks its customers to be motivated by price rather than the value offered. This can be very disastrous as the company loses its brand image and dissolves its market segment. Without a stable and well thought of pricing strategy, company can lose major part of perceived profit with fall in prices.

CUTTING COST

Major factor that affect a business during recession is the phenomenal decrease in profit. With immense decrease in profit margin, company is forced to adopt cost cutting in order to conserve cash.

Financial constraints force companies to cut cost not only on tangible factors such as plants but also on intangible factors such as marketing, R&D and training. During recession expenditures such as promotional, sales and market research outlay are cut first as they don’t show any immediate return on investments. Moreover, companies cut cost of those areas which don’t show any immediate results neglecting the medium term prospect of the same. Their tends to be a conflict between short term strategies and long term strategies.

Such cost cutting of sensitive areas can largely hamper the customer service offered by the company. It also hampers the quality of products and the service associated with it. Thus even in the state of immense economic crisis, the company must not neglect the promises associated with the brand which it offers. The overall brand image and identity of the company and the product and services must not deteriorate due to such steps to counter recession.

The problem that companies face during cost cutting is to distinguish the factors which are beneficial to the company and which are not. Cutting the cost of such factors further add on to the crisis of the company and are a major factor for the economic crisis as a whole. So it is dangerous scenario for companies to adopt such quick fix solutions as the time taken for economy to turn faces is large and such measures will only add long term despair to the company instead of short term relief. Thus there is an immense need of some proactive measures to save the business from ill effects of economic downturn.

EFFECTIVE MARKETING STRATEGIES FOR A RECESSION

A major solution which will protect companies from the economic downturn and also increase their profits is the initialization and adaptation of an Effective Value Marketing Strategy. Value marketing is the process of providing as much value to the customer as possible in order to meet his needs and retain and develop his loyalty. A network of loyal customer extremely help companies to withstand economic downturn, but it is extremely hard to predict the customer demand as the scenario is highly fluctuating during economic crisis. Thus a proactive approach is extremely important to stay ahead in the shrinking market during recession.

Above statistics from a survey shows that the most efficient and sought after strategy to overcome recession is Value marketing,

EFFECTIVE PRICING STRATEGY

It is highly crucial to bring a balance in the pricing of products during recession. A product can’t be priced too high or too low. The price should be just right to gain maximum benefit. It is very important to consider demand elasticity during setting up prices as elasticity is a highly effective indicator of competitive advantage.

Factors to be considered while considering the price elasticity of demand:

• Market in perfect or imperfect competition: Contrary to consumer products, the elasticity of demand for industrial products is low in an imperfect competition. Thus, a change in price of industrial goods won’t affect as much as the change in price of consumer goods.
• The importance of product to the customer: A product which has very less substitute and there is urgency to buy that product by the customers, both indicate the importance of the product.

ELASTICITY OF DEMAND BY STRATEGIC IMPORTANCE AND QUANTITY PURCHASED

The elasticity of demand is most elastic on the right side of the matrix where large quantities are bought. The elasticity of demand is higher for those products which are taken for granted. The change in price of inconsequential products like paper clips would have little effect whereas change in price of essentials such as raw material would be really important. Thus the change in the products on the right side is strategically important.

• Inertia: Businesses seldom opt for change in suppliers from the once they already are associated with. A huge inertia exists among companies for involvement of change. During price change also companies tend to stick to their suppliers unless the raise is beyond 15% (10% in recession). Inertia is an important aspect which must be considered by formulating a strategy against recession.

Different price strategies to formulate marketing strategies are:

• REDUCTION IN PRICES: Prices can be reduced by adjusting product offerings and being in sync with the competitive prices. Prices should also be such that profit margin should not hamper. Product offerings can be adjusted to be suitable to the exact customer needs by bundling or unbundling. Reduction is a short term to medium term tactic which can help to ease out capacity and prevent spoilage of goods. Discounts can be given to stimulate sales. They can be very effective if used under the optimum long term pricing strategy of the company. HUL, after observing a decline in sale of its FMCG, dropped the price of various products to match those of its competitors so as to retain its customers.
• RISE IN THE PRICES: Prices can be raised to increase cash flow, but company must take extra caution in price rise implementation under the long term pricing strategy of the company.

The prices must be raised such that the reduction in sales must be countered by the increase in profit per unit. Thus it is highly essential to know the price elasticity of demand to know the optimum level of price rise to gain maximum profit.

REINFORCEMENT OF BEST SELLING BRANDS

One of the major strategies adopted by many companies was to reinforce their brand. Automobile companies brought in various product improvements and variants. Bajaj and Hero Honda launched the new Pulsar and Passion Plus. Tata Motors launched the new Indica Vista and Honda brought out a new variant of City.

INCREASING PROMOTIONAL SPENDING

Many companies took advantage of the economic downturn to press the throttle over their promotional campaigns. IPL and 20-20 World Cup saw many companies getting involved and spending huge amounts to be heard and spread the brand image among viewers.

Many companies resorted to social media like orkut and facebook as a cheap way of connecting directly to customers and using these mediums for promotional purposes.

The transition in various marketing tools is depicted above. It is seen that there is an immense increase in the use of internet and other electronic media as they are cheap and a very effective means of reaching mass customer base. The incline towards traditional marketing tools has drastically decreased and new innovations have replaced them.

EFFECTIVE STRATEGIES IN CONTEXT OF ANSOFF

During an economic downturn, managers are too much involved in problem resolving that they lose sight of advantageous opportunities. Managers must ask themselves following questions (Financial Times, 22nd January 2009):

• Are competitors retreating from opportunities that we can seize?
• Should we double down in growth markets, such as BRIC economies, rather than retrenching to our core?
• Does our customers’ or competitors’ pain create an opportunity for us?
• Can we snap up key resources at bargain prices?

Managers must realize that there are other ways to beat downturn by getting into new areas than being confined to existing ones.

Existing product to existing markets: The top 20% of customers in a business may generate as much as 80% of the company’s profits, half of which are lost serving the bottom 30% of unprofitable customers (Kotler and Keller, 2008). Thus is it very important to retain existing customers for which all marketers need to target their offering against segments that value their offerings. Also the company must totally concentrate on its core competency and try to eliminate any weakness associated with it.

Existing product to new markets: Another very important solution to beat recession is to exploit new industrial sectors or geographical areas in order to increase cash flow, profits and market share. This opportunity can provide significant return on investments if the company has sufficient resources to enter the new market and establish itself. For example, HSBC recently announced plans to expand further into Vietnam, Laos and Cambodia (Wall Street Journal, 6th February 2009), and a portable electrocardiogram monitor that GE Healthcare developed in India to serve local rural markets has ultimately found markets in numerous other countries (Financial Times, 5th February).

New products in existing markets: A lot of emphasis must be given to product development and its must be a continuous process. Innovation is the key to stay ahead of the competition and be a sole and dominating player in the shrinking market. However product development can be a costly and lengthy process but better cost efficiencies can be obtained by substitution. It allows eradicating entry barriers and initiating new product strategy in a cheap and quick way during downturn.

New products in new markets: It is highly risk oriented approach especially during recession as high investment is required.

ET AWARDS FOR CORPORATE EXCELLENCE (COMPANY OF THE YEAR): HERO HONDA

The Economic Times, 7 January 2010

The Munjals of Hero Honda turned management wisdom on its head by spending more to fight a slowdown when most other companies cut back. This resulted in record sales, profits for shareholders and the Company of the Year award from The Economic Times.

Hero Honda spent more on product launches, marketing and opening showrooms in more villages. They focused on decoupling of income-driven rural and the debt-driven urban economies during credit crisis. They increased the pace of putting in new models and variant, six in the past 12 months, and doubled their touch points from 2000 to 4000 in past 3 years.

To counter major threat from the likes of Bajaj, Hero Honda looked for new markets away from cities. The decision to tap rural markets with an exclusive department and the ‘Har gaon, har aangan’, every village, every home, programme kept sales high even in the worst months of recession. Recession being stock driven effected the the urban market but rural market was immune to it.

Another strategy that Hero Honda adopted was to pay its vendors 15 days in advance instead of the deadline of 45 days for which they claimed a discount. This adds 40 basis points to the EBIDTA, which is earning before interest, depreciation, taxes and amortization. All these strategies led Hero Honda to record a 95% increase in net profit.

CONCLUSION

Marketing is the first area where cut back are witnessed during recession. So marketers must develop their strategies accordingly. Marketing strategy is a principle which remains the same irrelevant of the economic scenario but the practice of these strategies is what changes during adverse economic times.

The difference in marketing strategies during boom times and during crisis have been mentioned above.

In general scenario, companies resort for short term fix for overcoming recession. They tend to neglect long term advantages and opportunities. These short term tactics like reducing prices and cutting costs are a very short term fix and doesn’t help the growth of company and does provide real immunity to recession.

New value oriented marketing strategies must be incorporated. Proactive measures must be adopted.

Above matrix gives an overview of different strategies which can be applied and their relevant importance. Pile it high, sell it cheap strategy can be efficient in having immediate fix to the problem but lacks the potential for long term growth. Innovation is the key to withstand the waves of recession and to stand ahead of competition in times of great turmoil and seek new opportunities.

In conclusion, an effective marketing strategy is the one which:

• Meets the key objectives of the strategy.
• Understands the elasticity of demand in the market.
• Delivers the return on investment in the anticipated timespan.
• Allocation of available resources to gain maximum returns.

REFERENCES

• Strategies for diversification; Harvard Business Review Vol. 35, Igor Ansoff.
• Coping with Recession; Cambridge University Press.
• Marketing Management 12e; Pearson Prentice Hall, Kotler P., Keller K. L.
• Counterturbulence Marketing; Samli, Coskun A.
• Blue Ocean Strategy; Harvard Business Review, W. Chan Kim and Renée Mauborgne.
• The Marketing Mélange
• Successful Strategy Execution, Syrett M.
• The Boston Globe, Gregory A. Patterson.
• Financial Times, 22nd January 2009, 5th February 2009.
• Wall Street Journal, 6th February 2009
• The Economic Times, 7 January 2010
• www.b2binternational.com/services/full_service/customer_satisfaction.php
• www.mb-blog.com/Images/Recession_POV1_Final.pdf
• www.adclubbombay.com/index.php?option=com_content&view=article&id=1773:how-marketers-faced-recession-in-india&catid=81:columns&Itemid=44