Price and Advertising Effectiveness Over the Business Cycle

Conversionvan Heerde, H.J.; Gijsenberg, M.J.; Dekimpe, M.G.; Steenkamp, J-B.E.M. · 2013Journal of Marketing Research
Topicsprice elasticity·advertising elasticity·business cycle·recession·cpg·cross elasticity

A recession is forecast, and the leadership team wants one rule for the whole portfolio: cut advertising, hold price. Applying this evidence, the team instead plans a price defense for its beverage brands and value mass brands, where long-term price sensitivity rises most in a downturn. It expects advertising to buy less sales growth until the recovery. It then sets the rules by brand position and product class rather than portfolio-wide.

A recession makes shoppers more price-sensitive and advertising less effective, and the shift builds over months rather than showing up in the first weeks.

Month to month, sales respond to price and advertising about the same in good times and bad. The response that accumulates over months does change: consumers grow more price-sensitive in contractions and less so in expansions, advertising sells more in expansions, and competitors' price cuts take more sales in contractions. The pattern differs by brand type and product class, so one downturn rule does not fit a portfolio.

Data chart

The same contraction produces different price and advertising responses by product class

Food-1.01-.88Beverages-1.21-.95Household care-.97-.96Personal care-.57-.52

The downturn pattern differs enough by product class that a uniform portfolio rule would conceal the categories under greatest pressure.

Action guide

  1. Judge downturn effects on cumulative sales over months, not the first month's sales.The economy changes how sales build up in response to price and advertising over time; the same-month response barely moves.
  2. Expect more price-sensitive customers in a downturn and harder-working advertising in a recovery.Set separate planning assumptions for contractions and expansions.
  3. Defend against competitors' price cuts during downturns.Brand sales become more vulnerable to rival pricing in contractions, so competitor price monitoring belongs in the downturn plan.
  4. Set downturn rules by brand position and product class, not portfolio-wide.Beverages and value mass brands lose most to rising price sensitivity; household care barely moves.
  5. Add margin and competitive-response economics before reallocating budget.The study measures brand-sales response, not profit, margins, or ROI, so it cannot by itself settle the most profitable allocation.
  6. Apply this to established packaged-goods brands in mature markets.The data are 150 U.K. national grocery brands, 1993-2010, measuring sales rather than profit; test before extending it to durables, services, or private labels.

Evidence

  • Same-month sales response to price and advertising does not change with the economic cycle; the response that accumulates over months does.
  • Over the long term, consumers become more price-sensitive in contractions and less price-sensitive in expansions.
  • Advertising's long-term effect on sales rises in expansions.
  • Brand sales become more vulnerable to competitors' price cuts in contractions.
  • As an illustration of size, the model puts long-term price sensitivity about 14% higher, and long-term advertising effectiveness about 60% lower, at the 2009 trough of the U.K. financial crisis than at the 2007 peak.
  • The pattern differs by category and brand type. Beverages change most and household-care price sensitivity barely moves; value mass brands show the largest rise in price sensitivity in a contraction.

Key takeaway

Over the long term, downturns raise price sensitivity and lower advertising's effect on sales.

Source

van Heerde, H.J., Gijsenberg, M.J., Dekimpe, M.G., & Steenkamp, J-B.E.M. (2013). Price and Advertising Effectiveness over the Business Cycle. Journal of Marketing Research.

Evidence strength: Strong. The evidence covers monthly U.K. data for 150 national packaged-goods brands across 36 categories, 1993-2010; it does not estimate profit or ROI and is less applicable to digital advertising, private labels, durable goods, services, emerging markets, or non-U.K. markets. Several cycle effects meet only a p < .10 standard, the crisis-period percentages are model illustrations rather than separately tested estimates, and the brand-type and product-class splits rest on small, unequal groups. The study reports little cycle variation in competitive effects overall and warns that the number of effects tested may have strained the model.