Marketing in the age of frugality

In the article "The New Consumer Frugality," by Egol/Clyde/Rangan from strategy+business magazine, the authors restate and expand opinions I made in earlier posts, including Fear and the American Consumer, wherein I supposed a world where fear, uncertainty and doubt (FUD) was the primary motivation of consumers and again in this post, where I suggested that there was a new normal of a higher savings rate, less consumer spending on credit, and general 'new religion' on main street.

The authors state that according to a Booz and Company study, fewer than 20% of consumers will return to their pre-recession spending levels. (It's nice to be right.)

The authors state: "A new frugality, characterized by a strong value consciousness that dictates trade-offs in price, brand, and convenience, has become the dominant mind-set among consumers in the United States — and probably in other wealthy countries as well. Two-thirds of American shoppers are cutting coupons more frequently, buying low price over convenience, and emphasizing saving over spending. Per capita consumption expenditure has declined across demographic groups. Consumer sentiment remains weak. These trends are not going to change, no matter the pace of economic change."

Then again, given that more than half this country's GDP is consumer spending, it'd be good to be wrong in this instance.

Still, what does this New Frugality mean for marketers?

Repeating a mantra of marketers weathering each recession, the authors state that we should continue aggressive marketing in a recession - but that unlike earlier times, that the return to 'better days' will not be marked by a return to normal strategies in product, pricing, promotions or distribution. The increased emphasis on, and redefinition of, value (defined as a combination of price, brand, and convenience) will drive decisions across all consumer groups - and this, combined with the community and transparency brought about by the rise of Web 2.0 means that credibility and performance will be paramount to consumers; views of this value judgment less impacted by status positioning and clever brand advertising than by collective market experience. And while brand awareness and loyalty are proven out by the experience, the post-recession consumer will seek out distribution channels that offer the best measure of that brand combined with price and convenience.

So two main lessons of the quoted study involve pricing strategy and promotions strategy: When looking for pricing solutions, the identification and segmentation of customers is, as one might expect, paramount. Price only to maintain profitable return on the most loyal customer segment where value continues to be perceived. As I stated last December, consider pricing strategies and tiers for various channels to deliver the best value as judged by each segment using different channels.

The second lesson involves MarCom. Develop promotional strategies that articulate the convenience (in distribution), pricing tiers and brand selection at all consumer/brand touch points. As the authors remind us, this will require marketers to embrace new advertising and promotion capabilities, particularly those around new digital tools that engage consumers at all points in the buying decision and encourage desired purchasing behavior.

The New Frugality is more than a new economic normal. It is a sea change. We now find ourselves in the 'frugal age' - and it will define us as much as the digital, space, or industrial ages did before.

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The price is falling! The price is falling!

Just a note for the editors of marketing pubs out there: "how to market in a sagging economy" articles have been done. To death. Okay, we get it. Preaching to the choir here. Move on.

Its a valid subject, but most of these articles are promotion-oriented. What hasn't been discussed as much is the role of price strategy in a sagging economy, and generally. This especially occurs to me today because of a current client project, where pricing strategy is the current key gating concern prior to product launch.

Obvious Secret #1: Pricing strategy, especially in a weak economic environment, has little to do with, well, price.

Even in the best of times, great products, great promotions, clever ads and a loyal base can be undone by a misguided or misapplied pricing strategy. This is because left to their own devices, finance and sales executives will see sagging demand as a numbers issue and not a brand issue. Plus, it is expedient to react instinctively with a red pen (cutting prices) when profits shrink and sales falter.

Bad plan.

Unstudied discounts are not as easily undone tomorrow as they are done today. Price cuts are a short term solution to a larger, longer term issue; that is, the product hasn't established the brand position to maintain margin in a discount environment. Understand that price cuts are welcomed by consumers but always create subtle dissonance - an inability on the part of the consumer to properly relate price to value, so when the market returns upward, as it always does, this results in a nearly Sisyphean effort to re-establish a brand position held prior to the discount. Pricing is not a cost issue - it is a value issue.

Understand the way customers make buying decisions and become far more visible, and more efficient, in delivering on these criteria; this will always be more effective in building recession-proof brands. This is because pricing is a long-term strategy, not a short term tool. When the economy sours, there are other levers to pull - operating costs, added value, extended hours, free upgrades. Think about supplier pricing and work new billing models to manage cash flow. Invest in money-saving IT investments such as Unified Communications and collaboration products. Reevaluate your market position and consider new marketing initiatives to go after markets competitors might have recently abandoned. Fire some costly customers. Adjust invoicing offers and procedures to improve cash flow and reduce defaults. These tools and others are manipulated in good times and bad with far greater flexibility than price, which can only move in two directions: up, or down.

Its easy to be Chicken Little and think in blocks of fiscal-quarter-bound panic over a current fiscal situation, but creating and applying the right principles for pricing allows for decisions that over time not only weather current storms, but position a company for consistent growth over the long haul.

Fear and the American Consumer

In a recent article in his newsletter Drum Beat News, my colleague Jack Howe writes of the death of 'conspicuous consumption':

"Luxury buying is off in a major way - reports from Neiman's, Saks, and all top brand name retails report the same cut back from their consumers. So the company that must survive is making sure they offer solid business cases with every offer. Understanding the consequence of how the CEO, at the business your selling to, gets paid can pay off for you, the seller. As consumers, we are still spending, just not in the ways we were before. It is highly unlikely, given the cost of bailing us out of our current economic situation, that we will in our life time, see a return to what we knew as conspicuous consumption."

Interesting also is his observation in the same article that the increasing homogeneity of automobile design also points to the idea that 'standing out' is 'out'.

Whether or not I agree that recent poor auto design is a sign of a larger cultural shift, the apparent death of 'conspicuous consumption' is an interesting argument and worth evaluating from a marketing perspective. Given rising national and personal debt, a worldwide credit crisis, inflationary pressures on energy and food stuffs, plus the impact of environmental awareness and regulation, comfort with high levels of consumption no longer looks - or feels- 'right'. There are even anecdotal stories of monied customers foregoing store-branded shopping bags in order to keep a lower profile on their ill-timed retail therapy.

For years many marketers have relied primarily on brand prestige (associating personal attributes onto or from a product) and constancy (that is, 'I know what I'm getting', aka 'no one ever got fired for buying IBM') to maintain market share and margins. With the new normal of a slower consumer engine on the economy, we must re-evaluate what motivates customers now. I see these four are among the leading motivators:

Value: The rise of the big box discount chains, while suspect themselves in this era of the 'new normal', provide insight into consumers desire to buy in bulk, reduce packaging, and generally 'stock up' in what is perceived to be a very volatile period in our history.

Necessity: Discretionary spending is off, minimalism is in. Name your own example: Even here in truck-crazy Texas, Hummers are criticized, while the sparse Prius hybrid is envied. Vacations are out, staycations are in.

Savings: Once arguably in negative territory, personal savings in the United States has turned to a pace not seen in years, some estimates now as high as 4%. Anti-debt radio personality Dave Ramsey has a slogan that says it best: "...the paid off home mortgage has taken the place of the BMW as the status symbol of choice."

Fear: Arguably the previous three motivators are a result of fear to one degree or another. But this is a non-specific, generalized fear of a quickly shifting geo-political and economic landscape. Remember what happened to action movies after the Berlin Wall fell in 1989? Stallone had to find new enemies because the Ruskies were our pals. It was easy in an earlier era when Russians were the bad guys and we had a collective target for our enmity. But the new political environment, unnamed terrorists have exacted far more damage to our lives and psyches in the last decade than the Russians did in the prior fifty years.

Once, leveraging FUD (fear, uncertainty, and doubt) was the last refuge of marketers unable to sell a product or solution on merits. Today, it seems to be the self-imposed primary motivation of consumers. And in a world where banks are bankrupt, car manufacturers are nationalized, real estate is no longer an inflation hedge, terrorists have us disrobing to get on an airplane, and the national debt clock needs more light bulbs, who could blame them?

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Unpopular popularity

"Nobody goes there anymore, its too crowded" is one of my favorite 'Yogis', so named for the famed Yankees catcher who is perhaps as famed for his unique turn of phrase as his play on the field.

In a study released by the Proceedings of the National Academy of Sciences, however, we find that, once again, there is a lot of truth to what Yogi Berra has to say. The study illustrates that the fall of an item or style in popularity mirrors its rise to popularity, so that items that become popular faster also die out faster.

These, my friends, are called fads. The study's authors were quoted as saying that “While it is easy to see products, ideas, or behaviors catch on in popular culture, less in known about why such things become unpopular." And this question is as critical a question to marketers as any.

In a cross-cultural, non-commercial study that harkens to Levitt's book Freakonomics, study authors Berger and Le Mens analyzed baby names in France and the US over the past century. The two researchers found a consistency in the rise and fall of given names - that the longer it took for a name to become common, the longer it took for the name to fall out of use. Parents interviewed indicated that they were simply unwilling to risk saddling their child with a name they perceived as 'faddish'.

For marketers, these results indicate that it is the perception of a trend that makes the creation of a fad self-fulfilling. While somewhat intuitive, there is often no scarcity or other economic factor that forces certain trends that 'hockey stick' in popularity to die out faster. Instead, the concept of 'the harder they fall' is based in the idea that people, for all their concern about fitting in, don’t want to be seen as following the herd. The key is perhaps in not controlling the growth, but in marketing the message - even as sales rise without apparent assistance from 'those guys in marketing' - that the growth is because of the value offered by the fast-growing product or service, and not transient fads.

And that will mean that in addition to trying something, marketing will keep people coming back, even as it gets more crowded.

Warning signs

The other night I had an "I Love Lucy" moment – I found myself desperately, and ultimately unsuccessfully, attempting to stem the tide of about 75 PSI of water shooting from what had been the stem control of an upstairs bath.

I had been ignoring a persistent drip for weeks.

Together with a client, I was speaking yesterday with a lovely woman who runs the Diabetes Education Center at a local hospital. The topic soon turned to preventative medicine, and the number of people who discover they have diabetes only after entering the ER with blood sugar levels in the 700s (that’s really high).

They were ignoring the frequent urination, constant thirst, weight loss, fatigue and other warning signs of diabetes.

Last month a neighbor had to be rescued from the side of a busy highway during rush hour when her transmission gave out and she slowly glided to a permanent stop on the gravel shoulder. The car had been recently detailed, however, so it looked sharp as it was hoisted onto the back of the battered tow truck.

She had been ignoring the thump and jolt from the backend of her foreign sedan for months.

And of course, we can all point fingers at the politicians and bankers and brokers and others who ignored the warning signs that have led to the current world financial credit crisis.

What are you ignoring? What are the warning signs in your own business that need attending to?

Are consumer complaints increasing? Is innovation fading? Are too many of your receivables over 120 days out? Do your employees fear the next 'all-employee meeting'? Has cash flow become the dominant topic over the water cooler, instead of tactics and strategy?

None of these scenarios are uncommon in a weakened economy. But what are you doing about it?

There are no easy answers to these problems. But analyzing the problem for weeks isn't helping. The quicker you act and the more decisive the action – any forward action – the greater the likelihood of preventing the situation from truly getting out of, that is, beyond your, control. Once a problem is beyond your control, it is too late and the options for a remedy, such as they are, are never good ones.

Okay, so this post doesn't say much that hasn't been said before. But if you've ignored the same reminders before, here's your chance to act.

Regardless of the specific corrective action required for your company's circumstance, the immediate requirement is communication. Internal and external communication to explain the company's circumstances to employees, partners and customers; reinforcement of company values and vision, and each individual's role in fulfilling the company's mission; the long term and near term future for the organization. And communication is a two –way street as well, that is, remaining open for customers to become real-time sources for feedback and product ideas, perhaps seeking out suppliers willing to extend finance terms, and listening to employees for suggestions regarding improving operational efficiencies.

The important thing is not to ignore the constant drip, drip, drip of market erosion and declining revenues, blindly hoping that a sudden macroeconomic recovery is around the corner, a rising tide that raises all boats. Don't ignore the warning signs. Take action now, because like my plumbing, the 'pressure' to take corrective action now is only building.