What promises to be the longest and deepest global recession since the 1930s took many marketers by surprise. What appeared first as a crisis affecting the US home mortgage market soon morphed into a global financial meltdown and the evaporation of consumer credit.

Given an average household debt in the US of 130 per cent of annual household income, it was inevitable that a downturn in consumer confidence would follow, along with a substantial reduction in consumer spending, which accounts for 72 per cent of US gross domestic product. How should marketers, few of whom are experts in macroeconomics, respond to these conditions?

It is important to understand how customers are reacting to the new reality, how their attitudes and behaviours are changing, how easy it is for them to switch suppliers or stop buying your products and services, and whether the shifts that are evident today are going to continue once the economic recovery kicks in.

What is certain is that the market segmentation scheme you were using to plan your marketing budget and programmes this time last year is obsolete. You need to listen to your customers and possibly develop a new segmentation approach. We have identified six segments of consumers based on their response patterns to the current crisis.

We have found that the consumer mix varies across categories and across brands within categories, with stronger, trusted brands being less vulnerable to downward pressure on prices and margins:
■ Naysayers are frightened consumers who have stopped buying any discretionary purchases and are trimming their daily purchases. They are, for example, trading down from fresh to frozen vegetables, sharing a single tube of toothpaste among family members and switching from single-purpose, specialised cosmetics to multipurpose products. They are either out of work, in fear of being laid off or know people who have been.
■ Short termers are younger, urban consumers with few savings who have, therefore, lost little in the financial meltdown. They will carry on as normal unless and until they lose their jobs. They will then have to adjust their consumption behaviour almost overnight, as they have no savings cushion.
■ Long termers are consumers who see the reduction in their retirement accounts as an unfortunate bump in the road. They are worried but not panicked. They are adjusting their purchasing behaviour by searching out the best deals, emphasising functional over emotional benefits, trading down to simpler versions of products they need, making fewer impulse purchases and foregoing some luxuries. However, they remain broadly optimistic and are not shutting down their consumption.
■ Simplifiers are baby boomers who have lost a significant percentage of their savings, and, as a result, have become more risk averse and are reassessing their values. Some will conclude that they must postpone retirement to recover their net worth. Others will decide that they can make do with less, reduce their consumption and simplify their lives.
■ Sympathisers are savvy consumers who switched into cash ahead of the crash but who know others who did not. They could afford to buy a new car but they do not want to appear ostentatious. They are continuing to spend at near-normal levels but more discreetly.
■ Permabulls are relentlessly optimistic. Their “here today, gone tomorrow” attitude has them looking for opportunities to make up for lost ground and find the next million dollar idea or stock pick. Their appetite for consumption remains constrained only by the availability of credit.

Marketers must understand how these six segments overlay their existing customer mix. They must understand the shifting price sensitivity of their current and potential customers and how it is affecting where and how often they shop. They must adjust accordingly the mix of marketing devoted to brand franchise building versus short-term promotions, such as coupons and rebates, that can sell products quickly, albeit at lower margins. In this recession, for example, the BMW 5 series may gain relative share at the expense of the pricier 7 series. Sports car sales may decline but demand for hybrid vehicles may hold up better than the rest of the car market.

Hope and change

Marketers must not be glum. They must balance an empathy for the financially distressed consumer with a resilient, perhaps even defiant, spirit of hope and optimism. The appropriate blend varies from one product category to another.

In general, consumers in a recession will screen out advertising messages that are based on fear appeals. There is enough uncertainty in the environment already. More appropriate are advertisements that emphasise the reasons, especially the functional features, to trust in a brand, evidence that a brand delivers value, and an emphasis on core benefits that relate to family values, friendships and relationships. Gillette’s ads for its top-of-the-line Fusion shaving system justified the premium price by stressing its high-tech features, comparing the product’s performance to Nascar race cars.

In the face of doom and gloom, we all need to be uplifted. Many brands in the US, for example, are attempting to piggyback on the enthusiasm for Barack Obama, US president. Ikea has called on consumers to change their furniture to mark the new president in the White House. Pepsi launched a new logo and ushered in 2009 with a celebration of “Optimismmm”. Under the umbrella of a new slogan “Refresh Everything”, the company’s website invites consumers to submit their thoughts to “the man who is about to refresh America”.

When consumer spending power is limited, marketers are not just competing to maintain or build share in their own stagnant or shrinking product categories. They are competing against all forms of substitutes and, in a real sense, competing against all other expenditures for their share of the consumer’s wallet. Brands such as Pepsi and Coca-Cola that depend for volume on millions of consumers choosing them every day must continue to project positive messages in their advertising while ensuring that their pack sizes and retail price points are adjusted to cater for a more frugal consumer.

The best antidote to margin degradation, in good times or bad, is innovation. Some companies fear launching new products in recessions – with good reason if the product is merely a superficial line extension that adds little value. But an exciting new product that offers functional value as well as emotional appeal should not be held back. For one thing, the clutter of new products competing for consumers’ attention will be less than normal. Second, if you delay until the recovery comes, you will join a backlog of new products all trying to secure shelf space at the same time. Third, delaying today’s product launch may delay launches of additional products you have in the pipeline, permanently undercutting your competitive edge. Rather than delaying a new product launch, shape the value proposition to address the information and reassurance needs of today’s target consumers while retaining the flexibility to tweak the positioning as necessary when economic recovery arrives.

Change or die

A recession is no time to hunker down. It is a time to question the strategic rationale for non-core assets and the fundamental assumptions of your business model. Monster.com, a recruitment website, generates almost all its revenues from job posters, not job seekers. This business model works well when times are good but not when employers are firing rather than hiring. Perhaps the model should be re-evaluated to diversify Monster’s revenue streams.

More important, recessions often accelerate rather than decelerate underlying trends in consumer behaviour. Take use of the internet. With consumers spending more time at home rather than going out, internet use promises to increase. At the same time, consumers anxious about current and future job opportunities are more keen than ever to develop the networks that can help them with advice and job leads. Look for professional network sites such as LinkedIn to do well and for social networking sites such as Facebook to reach out more to professionals.

Most companies are not investing in internet advertising at a rate consistent with the percentage of time that their customers spend online. A typical US consumer might spend a quarter of his or her media time surfing the internet, but a typical US advertiser might spend only 7 per cent of the communications budget on search ads, banner ads and building brand community websites. Indeed, the major packaged goods companies, including Unilever and Procter & Gamble that do not sell their products directly to consumers online, typically spend a mere 2 per cent.

However, savvy marketers are accelerating their investment in and experimentation with digital media during the downturn. Kraft Foods, for example, is experimenting with the downloading of recipes to iPhones when consumers are shopping for groceries.

Many brands are running contests on their websites to encourage the creation of user-generated videos that are voted on by visitors to their websites. The goal is to build enthusiasm for the brand among a loyal cadre of consumers who will become the electronic spokespeople for the brand.

Of course, the recession demands adjustments in the communications mix to enable penny-pinching marketers to stretch their marketing dollars. These include substituting 15- for 30-second television ads; using less expensive radio ads instead of television to maintain advertising frequency to target customers; reducing outdoor advertising if fewer people are driving to jobs each day and others switch to public transport. But what is most important is to understand that the trend to digital is here to stay and to embrace it.

Planning for recovery

Conventional wisdom suggests that consumers return eagerly to their old attitudes and behaviours once a recession abates. Indeed, the theory is that pent-up demand during a recession is unleashed once consumer confidence rebounds and credit becomes more readily available.

This may well be true for durable goods such as cars and home appliances, which demand ever-increasing servicing costs the longer consumers hold on to them. It is, therefore, essential that manufacturers plan ahead to have the capacity available – whether internal or outsourced – to ramp up production and dealer inventories quickly. It is also predictable that, in emerging economies, consumers who were looking forward to owning their first television set or buying their first car will still want to do so once economic circumstances permit.

What is not so clear is whether all consumers in developed economies will revert to past behaviours. If the recession is long, as appears likely, new attitudes and behaviours are more likely to become ingrained. For example, preparing meals at home rather than eating out or buying in bulk are just two behaviours born of economic necessity that may continue after the recession ends. Coping mechanisms often involve collaborations with family, friends and neighbours that become a satisfying part of daily life.

Even before the recession, there was an evident move towards lifestyle simplification among baby boomers. The notion that many of us own too much stuff, that managing this stuff is expensive and cramps our style, that we may find more pleasure in experiences than owning things, that less is more, these are questions that we are more likely to ask during an economic recession. In much the same way that life-changing events such as marriage or divorce may prompt us to reappraise our basic values and goals, so an economic shock can provoke a similar response.

In no industry will the challenge of understanding customer behaviour and market segmentation be greater than in retail financial services. Consumer trust has been severely shaken as the share prices and integrity of hitherto stalwart institutions have been undermined.

Millions of investors have seen their assets slashed. Many feel cheated. How will they respond to an economic recovery? Many will remain more cautious in their investment portfolios than they should be. A second group, probably smaller in number, will be more aggressive than they should be, feeling the need to make up lost ground.

Yet opportunities will emerge from the crisis. It was no accident that John Bogle launched Vanguard, the investment management group, and Charles Schwab founded his brokerage in the wake of the recession of the early 1970s. These companies introduced new value propositions that resonated with consumers. In the same way, new value propositions will emerge from the deficit of trust induced by the current recession. Existing companies need to watch out for the flank attack from such innovative newcomers.

Finally, in planning for recovery, every marketer must understand the leading indicators that will signal a turnround in their industry and company. The generic indicators that a recovery is under way might include: sales of home safes in which to store gold bars; it takes one week rather than two weeks to get your shoes repaired; and you can actually find a parking space at Wal-Mart.

Katherine E. Jocz is a research associate at Harvard Business School and co-author, with John A. Quelch, of ‘Greater Good: How Good Marketing Makes For Better Democracy’
kjocz@hbs.edu

John A. Quelch is Lincoln Filene professor of business administration at Harvard Business School and a visiting professor at Ceibs
jquelch@hbs.edu