UNC Kenan-Flagler Business School

Shaping Leaders, Driving Results

UNC Kenan-Flagler Business School

ROI: RESEARCH INSIGHTS FROM KENAN-FLAGLER


A Dose of Reality for Today’s Marketers

4/1/2010

In economic downturns, consumers are more likely to turn to private labels

The marketers of Swiffer would like you to believe their state-of-the-art dust mop will change your life.

The marketers of a similar mop sold under a private label want you to believe their product can change your life — and for less money.

In economic downturns, consumers are more likely to turn to private labels — also known as store brands — in place of national brands. And though they intend for the switch to be temporary, they often remain with the less-expensive store brand even after the economy improves.

To retain customer loyalty even during a recession, UNC Kenan-Flagler marketing professor Jan-Benedict Steenkamp worked with a team of researchers to find effective strategies for national brand managers.

Sales growth figures from 1998 to 2008 show that U.S. private-label growth outperformed national-brand growth almost every year, but particularly in contraction years. And the boost private labels enjoy in contraction years was not canceled out in subsequent expansion periods. This leaves permanent scars on national-brand performance.

Cans

Consumers might learn that private-label quality exceeds their expectations, making it more difficult for national-brand manufacturers to win them back. A wiser strategy for national-brand manufacturers is to convince their customers to stay loyal to the national brand all along.

Steenkamp and his colleagues found ways to reallocate marketing dollars more effectively in a tight economy when consumers are counting their pennies.

Using U.S. data that spanned more than 100 product categories over a 25-year period, they examined the seven marketing instruments used or ignored by managers and assessed which actions hit the target, missed opportunities and wasted money.

“Marketers tend to cut marketing support when the economy turns sour,” Steenkamp said. “But that can hurt national brands, not only temporarily, and leave enduring scars. What we show is that with the right mix of instruments, you can actually save money by doing less and be more effective.”

Steenkamp focused on those seven marketing instruments —“levers managers can pull to improve brand performance in the marketplace” — in three categories.

  • New product activity: Decisions about major vs. incremental innovation
  • Advertising activity: TV vs. magazine ads
  • Promotional activity: Temporary price reductions, features (such as inserts in newspapers) and in-store displays

Major or incremental innovation

Steenkamp found that the more novel the product, the greater its relative advantage compared to existing products. A major innovation like the Swiffer, a completely new mop experience, can corner the market for quite some time.

Incremental innovations merely update existing products, like adding flavors to Egg Beaters, a cholesterol-free egg substitute, and competitors can copy them quickly and easily.

Advertising Activity

Managers who decreased spending on incremental innovations and cut back on TV advertising during a tight economy were on target. Yet in a tight economy, managers who don’t spend money on promoting a new product miss an opportunity to cement loyalty to a national brand. Major innovations can be a new means to reach customers.

TV ads are image-based, and viewers see them as unsympathetic to the consumer’s economic situation in a recession. Print ads, on the other hand, are better at communicating detailed product information that could convince consumers of the superiority of the national brand.

Though managers advertise less on TV in a tight economy, they miss an opportunity by not ramping up their magazine ad budget.

Promotional activity

National-brand manufacturers are disinclined to use temporary price reductions because the tactic implies that the main difference between the national brand and store brand is price and minimizes the quality cues that give national brands a competitive advantage. However, during an economic downturn, priceoff promotions are well-received by consumers. They speak directly to the consumer’s pocket and reduce the price gap between national and store brands enough to prevent customers from switching. Managers miss an opportunity by decreasing their use of temporary price reductions.

A common practice is to increase the budget for features and displays during tight times. However, features can increase price elasticity. During economic downturns, this would reinforce even further the consumer’s price consciousness and add to the popularity of private labels. The effect is not quite so pronounced with displays, which generally don’t involve price cuts; but in general, increased spending for features and displays is “spoiled arms.”

In a booming economy, there is enough fat to absorb some bad judgment; in an economic downturn, good management becomes a survival issue.

Value of data and perspective

“Here’s where we, as academics, can make a difference that a consultancy might not,” Steenkamp said. “In order to pinpoint an effect, you need long data series, multiple ups and downs. Each cycle has specific things going on. If we focus on those special characteristics only, we won’t know, when the next downturn comes, what is different and what is regular for all cycles.”

“If you want a quick story about what is going on at present, certain gurus can be useful. But if you want a story that holds true tomorrow and the day after, you may want to turn to a university.”

Many managers exhibit herding behavior, Steenkamp said, just as investors tend to do in the stock market. One person does something that appears to be a successful move, and everyone else follows suit. A manager might rationalize that he is following the collective wisdom of the crowd, but in reality he has found a risk-reduction mechanism: How can he be fired for doing what everyone else is doing?

“Most managers are highly professional and want to make the right decisions,” Steenkamp said, “but they are not kamikaze pilots. You want to do well, but you also want to remain in your job.

“We at UNC Kenan-Flagler and the marketing department in particular are doing research that can help managers. That is our passion. We do research that is very relevant and can help managerial decision making.”

Jan-Benedict E.M. Steenkamp is the Knox Masey Distinguished Professor of Marketing and marketing area chair.