The global pandemic of COVID-19, the disease caused by the novel coronavirus, is disrupting economic activity around the world. Governments have closed their borders, shuttered many types of businesses and taken other dramatic actions to create social distancing in order to mitigate the spread of the disease.
As I am writing this article in late March, the full economic fallout from COVID-19 is not yet known and, in fact, will remain unknown for a while. However, two things are clear. The economic repercussions of COVID-19 will be huge and marketing spending is about to be put under the microscope in ways that we haven’t seen since the “great recession” of 2008-2009.
Some companies have already made substantial cuts in marketing spending in response to the pandemic, and many others will be facing such decisions soon. According to recent media reports, companies in the travel industry (airlines, hotels, cruise lines, etc.) reduced advertising spending by nearly 50% during the first two weeks of March, compared to the same period of last year. Companies in other industries are likely to follow suit. During the recession of 2008-2009,the growth rate of worldwide advertising spending fell from 5.7% in 2007 to 0.0% in 2008 to -9.5% in 2009, according to Statista.
Move Smart, Not Rash
The need to reduce costs during an economic downturn is obvious, but there is substantial evidence showing that deep and indiscriminate cuts in marketing spending are usually a mistake. Numerous research studies have demonstrated that maintaining marketing spending during an economic slowdown has a strong relationship with long-term profit, shareholder value and customer loyalty.
Therefore, during the COVID-19 epidemic, it’s vital for business, marketing and procurement leaders to make smart – rather than rash – decisions about marketing spending levels. And when it is necessary to reduce the marketing spending, it’s better to use a scalpel than a cleaver.
There are no silver bullet solutions for this challenge, and no solution will be right for every company. But there are some steps that all company leaders should be taking to guide their decision-making process.
In a 2009 article in the Harvard Business Review, John Quelch and Katherine Jocz described a model for how to manage marketing in an economic downturn. While this article is now more than a decade old, it is highly relevant today because it was written and published near the end of the recession of 2008-2009 and reflects the experiences of companies during that and earlier downturns.
The Four Customer Groups
Quelch and Jocz wrote that company leaders should take a basic step before making significant changes in marketing strategy or marketing spending. They argued that economic downturns change the psychology of customers and that companies need to segment their customers based on this “recession psychology.” They recommend that business leaders think of their customers as falling into one of four groups:
- “Slam-on-the-brakes” – These customers feel the most vulnerable during an economic downturn, and therefore they reduce all types of spending. This segment will usually include lower-income customers, but it can also include more anxious higher-income customers.
- “Pained-but-patient” – These customers are relatively optimistic about the long term, but not so optimistic about the prospects for recovery in the short term. They tend to economize in all areas, but do so to a lesser extent than the slam-on-the-brakes customers. For many companies, this will be the largest customer segment.
- “Comfortably well-off” – These customers typically have higher incomes and feel secure about their ability to ride out the economic downturn. For the most part, these customers do not make major changes in their buying habits, although they may become somewhat more selective.
- “Live-for-today” – These customers tend to carry on as usual unless they become unemployed. They respond to a downturn mainly by extending their timetables for making major purchases.
Customer Purchase Prioritization
Quelch and Jocz also argued that during an economic downturn, all customers will prioritize their purchases by mentally placing products and services into one of four categories:
- “Essentials” – Products and services that are necessary for survival or basic well-being
- “Treats” – Products and services that aren’t strictly essential, but are considered justifiable in some way
- “Postponables” – Products and services that are needed or desired, but whose purchase can be delayed
- “Expendables” – Products and services that customers view as unnecessary or unjustifiable
As a first step to managing marketing spending through an economic crisis, business leaders need to map their products and/or services to these customer segments and product/service categories. This analysis will enable company leaders to tailor marketing tactics and spending levels based on customer psychology, their likely buying habits, and how they prioritize specific products and services.
This analysis will not make marketing decisions easier, but it will enable business leaders to make more informed and strategic decisions that will minimize pain in the short run and position the company for success when the crisis abates.