The Black Swan Theory .. Marketing in the Times of Recessions

The Black Swan Theory .. Marketing in the Times of Recessions

The ongoing political and economical crackdowns in the Middle East are quite noticeable, in a way that was resulted in slow earnings last year and aggressive meltdown in the 1st quarter of this year.

The things about ‘Source Rock’ and oil prices in addition to political instability in Levant and Yemen, with two wars going on and terrorism attacks here and there. It all pooled in a situation where businesses in the Middle East are experiencing a serious recession.

The black swan theory or theory of black swan events is a metaphor that describes an event that comes as a surprise, has a major effect, and is often inappropriately rationalized after the fact with the benefit of hindsight.

With all the above mentioned situations, it seems as a whole flock of Black Swan events are circling the sky over the trade business and might at some point blot out the sun.

We know turbulence when it occurs but we never learn about ‘Crisis Management’ in good times!

We never pay attention to the flight safety instructions, but in the unlikely event of cabin decompression or water landing, most people don’t seriously contemplate what to do in the case of such an emergency, so they remain emotionally and intellectually detached from the very thought of such devastating events.

It is one reason why we react with ‘panic’ that results in many wrong decisions and outcomes.

Consumers also hear the bad news and switch from credit-based spending to saving, causing companies that sell automobiles, furniture, and other “postponables” to suffer declining sales. These companies, in turn, announce major layoffs that result in less available consumer purchasing power.

Meanwhile, companies slow down their buying from other companies, creating hardship for their suppliers, who in turn, lay off their workers and it keeps going on and on!

 

How do corporates normally respond to turbulences?


"Be fearful when others are greedy, and be greedy when others are fearful"

—Warren E. Buffett, CEO, Berkshire Hathaway, Inc.

BLACK-SWAN-1

Now let’s turn our attention to some of the most common mistakes that business leaders make when turbulence hits:

  1. Reducing marketing, brand, and new product development expenses
  2. Laying off staff (usually starting with the highest pay, in which they are the key people).
  3. Reducing producti
    on, liquidate inventories and ordering fewer goods from their suppliers. They don’t want to build inventories in the face of falling demand. They don’t want to slash prices in order
  4. Postponing new product development, training and putting major new projects on hold.

Executives should strive to make their operations more efficient and to reduce unproductive expenditures, especially in areas that show signs of bloat, regardless of the business conditions.

Too often, business executives make across-the-board cuts.  Although these approaches seem reasonable in the heat of the moment, they can eventually damage competitive positions and financial performance. In The Age of Turbulence, this damage can be irreparable.

And worst of all, they let fear dictate their decisions. This action will not only hinder but can even destroy a company!

To be frank, turbulence in the business world leads to all wrong responses from management.

 

Common Consumers’ Reactions to Crises

“In the consumer economy taste is not the criterion in the marketing of expensive soft drinks, usability is not the primary criterion in the marketing of home and office appliances. We are surrounded with objects of desire, not objects of use”

—Donald Norman - Director of The Design Lab, University of California, San Diego

Whatever your company’s marketing posture may be in normal times, it will change in turbulent times. That’s because in response to the recession your customers will change their behavior and what they value.

First, you should consider that consumers in the prospect of harder times and possibly even job loss, they will cut their spending. Here are three likely consumer behaviors:

  1. Consumers move toward lower-priced products and brands. They will replace buying international brands with local brands and even generic brands. This changed behavior will fall hard on national and international premium brands, especially the weaker higher-priced ones.
  2. Consumers reduce or postpone discretionary purchases such as autos, furniture, major appliances, and expensive vacations.
  3. Consumers cut back on driving and start buying more from suppliers nearer to their work or home. They will spend more time eating their meals at home and relying on in-home entertainment from TV and the Internet.

 

How to structure a marketing strategy that survives the storm?

"The ones who are crazy enough to think they can change the world are the ones who do"

—Steve Jobs, Co-Founder, Chairman, and CEO, Apple, Inc.

 

The first task is to recognize the major changes that have been taking place in the marketing landscape. Four key changes are listed below:

  1. things-to-remember-in-a-crisis_wide_t_nvCustomers are better informed than ever. They can find out almost anything about any product, service, or company by searching on the Internet and contacting others in their social networks.
  2. Customers are increasingly ready to buy and trust well known brands when they are priced lower than the well-advertised national brands.
  3. Competitors are able to copy faster any new product or service, thus shortening the innovator’s (ROI). Competitive advantages have a much shorter life today.
  4. The Internet and social networks have created radically new media and information sources, as well as new means for direct-to-customer selling.

These changes call for radically new thinking by managers and marketers. Smart companies are shifting from one way of thinking to another.

Major Shifts in the Mindsets of Marketers:

  1. From marketers thinking about the customers to everyone in the company thinking about customers.
  2. From selling to everyone to trying to be the best firm serving well-defined target markets.
  3. From organizing by products to organizing by customer segments.
  4. From emphasizing tangible assets to emphasizing intangible marketing assets (company brands, customer equity, channel loyalty, and intellectual property).
  5. From building brands through advertising to building brands through integrated marketing communications (IMC) and performance that satisfies.
  6. From making profit on every sale to building long-term customer value.
  7. From aiming for more market share to aiming for more share of each customer’s wallet.
  8. From being local to being “glocal” (both global and local).

One of the worst business responses to sudden turbulence and recession is to institute across-the-board cost cuts where, for example, every department must cut its costs by 10 percent. Imagine a highly regarded service company having to cut its service budget by 10 percent (better trim the fat, not the service!). Imagine advertising being cut by 10 percent at a time when the company needs more, not less advertising, albeit spent in a different way.

Within the marketing arena, those in charge at the onset of a recession are advised to consider the following possible moves:

  • Drop losing customer segments.
  • Drop losing customers within a segment.
  • Drop losing geographical locations.
  • Drop losing products.
  • Lower prices or promote lower-cost brands.
  • Reduce or discontinue ads and promotions that aren’t working.

 

Advertising

If the company spends heavily on thirty-second TV commercials, these buys will have to be cut down or eliminated. This is the easiest way to save a lot of money. If the company’s ads don’t carry any new information relevant to customers’ situations during a recession, they must be canceled. The marketing head has to rethink the company’s expenditures on other media as well, such as newspapers, magazines, radio, and billboards.

The money is better used on new digital media and consumer activities, which are often less costly and probably more efficient.

 

Pricing

No doubt companies will find themselves under strong pressure to cut prices, especially if this is the route that their competitors are taking. It is almost always better not to cut prices, but to offer some additional benefits instead, such as paying for the freight or offering a longer guarantee on the product. But these tactics may not work. This leaves two price-cutting possibilities: One is to present some stripped-down versions of the company’s offerings at a lower price. For example, a computer may normally carry a year of free repair service. Now the company can offer the product for less, but with only a three months warranty. The other approach is to offer a sales price, discount, or rebate on current products.

While price cuts usually work, the problem is that they can damage the brand image. If a company’s products are on sale 30 percent or more of the time, people start to think of the original price as being phony and not reflecting the quality of the brand.

Conclusions:

  1. Senior executives need to study more about crisis management, setup their backup plans in the good times, without the need to react in panic during the hard times.
  2. Cutting ‘mass’ cost is a disaster, you’d rather need to reallocate your budgets in a more efficient profile.
  3. Cutting advertising budgets in the time of need is not such a good idea, corporates are advised to maintain their brand presence & exposure, probably shifting into more cost efficient media such as digital.
  4. Slashing prices will communicate a bad message to end consumers, added value promotions will help instead.
  5. The good news is that recession might turn to be a good opportunity to acquire marketing assets, competitor’s business for unrepeatable price.

To learn about the author : Shehab Rashad

Sources:

  • Black Swan : The theory by Nassim Nicholas Taleb
  • Strategy in times of crisis - as seen by Noma Bar
  • Marketing Strategy in Periods of Economic Crisis – A case study of ICA, Coop & Axfood
  • Chaotics – The business of managing and marketing in the age of turbulence (Philip Kotler – John A. Caslione)

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