Introduction

In economic downturns, you must constantly evaluate the impact of your actions on both your short-term and long-term financial performance. Three general rules to be followed are: Avoid reactionary budget cuts; position with value engineering; and select products, services, and above all, customers.

Avoid Reactionary Budget Cuts

During difficult economic times, often organizations completely abandon their marketing strategies and cut back on their marketing efforts. If these cuts are reactionary and are made without regard to strategy, such actions can be a mistake. A downturn may be the most important time to maintain your level of marketing activity – or even increase it. Especially if your competitors are reducing their marketing expenditures, your own marketing expenditures will become much more effective. If you decrease your marketing budget, you may be helping your competitors.

Position with Value Engineering

Reactionary cuts in costs may affect not only marketing efforts but also the performance of products and services. When the economy is in a downturn, the instincts of many managers are to cut costs, any costs. Cutting costs may be unavoidable but you must be very careful of what costs are cut and how much they are cut. Cutting the wrong costs by too much can accelerate the negative impact of the downturn on the organization

Select Products, Services, and Customers

Difficult economic times do not affect all products and services to the same degree, nor all customers. You need to evaluate all your products and services and customers to determine where you wish to decrease, maintain, or increase your marketing efforts. (See David Rhodes and Daniel Stelter, “Seize Advantage in a Downturn,” Harvard Business Review, February, 2009, pages 50-59).

Survive and Thrive

You can develop and evaluate possible strategies in a downturn with the Growth Matrix (see Exhibit I).

The Growth Matrix has two dimensions – markets or customers and products or services. The organi-zation’s current strategies are in the upper left cell – current markets or customers and current products or services. Strategies that move the organization to new products or services are in the upper right cell and strategies that focus on new markets or customers are in the lower left cell. Strategies where the organization moves simultaneously to new products or services and new markets or customers are in the lower right cell.

Strategies for Current Customers and Current Products and Services

During difficult economic times, you need to focus on your current customers – at least on those that you want to keep. You want to retain those customers that are most attractive to you, and if possible, obtain more revenue and profits from them. It is always costly to recruit new customers, but in an economic downturn it may be very difficult to replace any customers you lose with new ones.

As shown in Exhibit II, there are four major components of customer contribution:

• Your customer’s total unit usage of the product or service.

• Your organization’s share of that usage.

• The variable margin per unit (price less variable cost per unit).

• Your customer’s loyalty.

To obtain higher contribution from your current customers, you can focus on any of these four components.

Total Unit Usage

Total usage consists of all the units of a product or service that a customer purchases during a specific time period. For example, total usage of soda would be all the liters of soda that he buys and total usage of business stationery would be all the pages of stationery a company purchases. If you can find a way to increase your customers’ usage of your product or service, then you can increase your contribution, provided, of course, that they make a significant percentage of those purchases from you.

Share

You would like to receive all the purchases of your customers but usually that is not the case. Instead, you typically receive a share of their purchases. By increasing that share you can increase your contribution from your current customers.

Your share depends on the performance of your product or service relative to that of your competitors. A bicycle store can increase their share with quicker repair service. A contractor can increase their share with innovative design and durable and attractive materials.

Price

During a downturn, often there is pressure to decrease your prices. You may need to do so but, if you do lower prices, lower them selectively – on those products and services and for those customers so that you will obtain the most positive effects in the long term.

Costs

Ideally the costs you cut should be unrelated to customer value. If you are constructing buildings and some parts of the building are not visible, then you might consider replacing one material with a cheaper but less attractive material – as long as they both perform at the same level.

Cross Selling

You can obtain more contribution and profit from your customers by selling them more products and services. What other products might your customers be willing to purchase from you? If you have a real estate agency, your customers may be willing to take your advice on purchasing property as well as homes. However, if you are a dentist, you may not be able to sell property as well.

Loyalty

Loyalty drives the customer contribution model in Exhibit I. It is the probability that your customer will make their next purchase with you.

Suppose for example that you supply containers to apple farmers and they sign a contract with you each year. Assume you start with 100 customers. If your loyalty rate is 80%, then 80 of those customers will remain with you for a second year, 64 for the third year, and so on. (Assume for simplicity that a customer who does not stay with you does not return in a later year.) On the other hand, suppose your loyalty rate is only 40%. Then the second year you have only 40 customers from the original 100 and only 16 the third year.

Selecting Customers

You may not want all your current customers and you may not want to expend the same amount of effort on all the customers you do want. During an economic downturn, you need to know the contribution of each of your customers or group of customers so you can make more effective use of your resources. Customers that are attractive include those that are relatively price-insensitive and those that buy large volumes (at reasonable prices).

You can organize your customers by revenue and by the cost of serving them (Exhibit III). The customers in the upper left quadrant of Exhibit III are attractive – high revenue and low cost of serving. You can expect competitors to try to obtain them, so be prepared to defend them. Customers in the lower right provide relatively low revenue for the costs incurred. You may want to `fire’ some of these customers – no longer serve them. (Perhaps give them to your competitors.)

Conclusions

When you market in difficult times, you must pay even more attention to each of your marketing decisions. In good economic times, you have some leeway to make mistakes; the margin for error is much smaller in not so good economic times. In particular, you must be precise in your choice of target markets and positioning and efficient in your tactics such as communication and distribution. Your first priority is your current customers. You should ensure that you retain the customers you want and explore ways to generate more revenue and more contribution from them. You should not disregard efforts to attract new customers or to introduce new products or services, but you should proceed carefully with such strategies and apply the same ideas of precise targeting and positioning that you use with your current customers.