The Skinny on Recession Psychology

6/15/2009 11:33:00 AM


You may remember a time in the not-so-distant past when compelling messaging and an attractive product mix was all you needed to increase sales volume and build your business. In today's economy, your job has gotten considerably more difficult; because consumers' values have evolved, not just their buying behavior, retailers are facing unprecedented challenges.

How do you reach a consumer base for whom skinny wallets have become trendier than skinny jeans?

Psychological Segmentation:

In the April 2009 edition of The Harvard Business Review (HBR), John A. Quelch and Katherine E. Joez published an article titled "How to Market In A Downturn" in which they discuss the need for marketers to rethink their current attitudinal and behavioral marketing segmentation schemes in order to carefully balance scaling costs, growing short-term sales and investing in long-term brand health.

The article asserts that while marketers typically segment according to demographics or lifestyle, this may not be the most effective strategy in a recessionary economy. Instead, smart marketers may choose to leverage psychological segmentation, which enables them to target consumer segments based on each groups' emotional response to the recession.

Psychological segmentation works because it enables marketers to operate based on an understanding of the way their consumers prioritize purchases. This is especially valuable during a recession, as costs are being cut at a time when marketing is more of a necessity than ever. Marketing is a “good cost,” essential to bringing in revenue from both existing customers and potential new ones; for best results, a retailer must ensure that they are crafting their messaging by segment, and focusing on those consumers most likely to invest in their product or service.

For example, while nearly all consumers consider basic levels of food, shelter, and clothing to be essentials, beyond that, consumers' perception of there own financial situations can sharply alter their views on whether they see a given expenditure as a want or a need. Likewise, determining whether a given product or service is an immediate or future need, or whether a treat is justifiable, tends to be highly subjective, and often varies during multiple points in the life of a buyer.

Note, however, that while some brands may cater to all segments the authors provide, most will not. The goal should be to first identify your key consumer segments below and then consider marketing accordingly.

Tailoring Marketing Strategy by Segment:

The slam-on-the-brakes segment is the most vulnerable and price sensitive of all groups. They reduce all spending by sharply limiting unnecessary purchases, postponing necessary expenditures, and, whenever possible, substituting the things they continue to buy with lower cost alternatives. Although lower-income consumers typically fall into this segment, anxious higher-income consumers can as well, particularly if they have been disproportionally impacted by the recession.

Targeting Tactics:

  • Consider highlighting discount prices and offering lower priced alternatives to your current product line.
  • If your product is not a necessity, you may want to consider offering it in a smaller size for a lower cost - this group is less considered about gaining value and more focused on conserving funds.
  • When selling a potentially postphonable product or service to this group, financing or layaway plans may help overcome their immediate financial concerns.
  • Marketing messaging might discourage postponing services, such as an oil change, because they will cost consumers substantially more in the long run if not handled immediately.
  • Expendables, or purchases consumers view as unjustifiable, will be a difficult sell for this group. To overcome these challenges, consider providing do it yourself alternatives to pricey services.
Pained-but-patient consumers tend to be optimistic about the long term but less confident about the prospects for recovery in the near term. They reduce spend in all areas, but are more flexible than the slam-on-the-brakes segment. They are the largest consumer segment and include most of the households where the primary breadwinner is still employed. As such, they represent a wide range of income levels.

Targeting Tactics:
  • Appeal to these consumers practical side by offering better pricing at higher volume - this can take the form of a loyalty club to foster repeat visits or discounts on bulk purchases.
  • Market non-necessities as affordable alternatives to luxury purchases.
  • Focus on promoting repair services - with their eyes on an optimistic future, this group is likely to prefer repairing a current item to purchasing a new one.
  • Build longer term brand awareness now, while you face reduced competition in the market place. Expect that the investment may not pay off until this consumer is feeling less financially constrained, but that it may pay off big in the future.
Comfortably well-off consumers feel secure about their ability to ride out current and future bumps in the economy. Their actual consumption has altered only slightly, but they are feeling more cautious about spending, and a bit guilty for indulging when others are struggling. The segment consists primarily of people in the top 5% income bracket as well as those who feel particularly confident about the stability of their finances.

Targeting Tactics:
  • Focus on selling online or other places where you can offer discreet purchasing opportunities to enable the wealthy to shop in secret.
  • Highlight any applicable charitable or green initiatives associated with your company - guilt about spending can be reduced if this group believes they are helping others simultaneously.
  • Showcase long-term value and quality - make it clear your product is an investment, not a mere babble.
  • Create a sense of urgency that helps consumers understand that they can save by buying immediately.
The live-for-today segment tends to be the least emotionally impacted by the recession. Typically urban and younger, they are more likely to rent than to own, and spend on experiences rather than products. They’re unlikely to change their consumption behavior unless, of course, they become unemployed.

Targeting Tactics:
  • Use social networking to generate buzz around your product and let consumers know what they may be 'missing out' on.
  • Promote exciting new products as 'must-haves'. This group has a profound appreciation for all things novel.
  • Remind them of the quality of life benefits to buying now, for example, "Buy it now, before someone else does".
  • Challenge these consumers to 'seize the moment' - they tend to enjoy seeing themselves as a bit impulsive.
While timing remains uncertain, in all likelihood the current recession will eventually end, and consumers’ attitudes and behaviors will likely shift yet again. To prepare for these times, retailers should be focused on consumer needs, their core brands, and a careful balance between long term and short term goals. Marketing methods must allow for targeting, accountability and the flexibility to make rapid changes in response to shifts in consumers' needs.

And, ultimately, those who consider consumer responses to the recession when crafting their marketing strategy and making decisions about where to invest, are likely to flourish - both in the present and long into the future.

Can you say the same for skinny jeans?


D.Y. said...

As I was reading through the strategies as outlined in the HBR article I couldn't help but recall the The Hyundai Assurance Plan. It appears to be a good example of a campaign strategy that helps the "slam-on-the-brakes" and "pained but patient" groups continue their consumption.

I've only seen this campaign offline on T.V. and I was surprised to see that a search for "Hyundai" did not bring up any ads related to the Assurance Plan.

Recently they have moved into offering a locked-in price for gas for 1-year to new car buyers, another interesting concept that likely targets the aforementioned groups.

Thanks for summarizing the HBR article, the content is helpful. Interested to hear if you've read the authors book as mentioned on the HBR page.

- Thanks, Dennis

D.Y. said...

An interesting article comparing companies that cut spending during a recession versus those that increase appeared on the financial page of the New Yorker (April 20, 2009) - "Hanging Tough". Early comparisons between Kellogg/Post and Chrysler/GM/Ford (less relevant given recent events) show how a recession can create opportunity for upstarts and incumbents (per my previous post Hyundai is also mentioned).

Eric Lopez said...

Thanks for highlighting the value of marketing in a recession and the opportunity for new businesses to gain market share during tough times. We haven't read The Greater Good yet, but are regular readers' of John Quelch's blog.

patricewilliam said...

An insightfull post. Will definitely help.

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