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

Economic contractions put advertising budgets under pressure. Long-term sales responses count the month of a price or advertising change and the months after. Imagine you approve pricing and advertising budgets for packaged-goods brands. Should every brand move money from advertising to discounts in a contraction?

Over the long term, sales respond more to price when the economy contracts and more to advertising when it expands.

Data chart

At the crisis trough, sales were more price-sensitive and less responsive to advertising

Percent change in the size of the total sales response to a 1% price or advertising increase, including the month of the increase and subsequent months, from the November 2007 peak to the May 2009 trough.

Sales response to price is about 14% larger at the trough.
Sales response to advertising is about 60% smaller at the trough.

At the trough of the global financial crisis, the model illustrates a larger long-term sales response to price and a smaller one to advertising than at the peak before it.

Figure 3 and text, p. 186; averages for 150 national packaged-goods brands in the United Kingdom. Exact long-term price responses: -.7863 at the November 2007 peak and -.8956 at the May 2009 trough; advertising: .0218 and .0088. The displayed changes round the ratios of these response sizes. The differences were not separately tested. Advertising shows no reliable change specifically linked to contractions and a reliable increase linked to expansions.

Data chart

Price responses differ by product class

Total sales lost per 1% rise in a brand's own price, in percent, including the month of the price rise and subsequent months; product-class averages at the November 2007 peak and May 2009 trough.

Beverages show the largest increase in sales lost after price rises.

Price sensitivity moves so differently by product class that one rule for the whole portfolio would hide the categories under the most pressure.

Figure 6, p. 189, evaluates product-class averages at two dates, not all expansions and contractions. Positive sales-loss magnitudes restate the signed price responses: beverages -.95 and -1.21, food -.88 and -1.01, personal care -.52 and -.57, household care -.97 and -.96. The text gives beverages -.9483 to -1.2096 and food -.8786 to -1.0101; the other values are the figure's labels.

Action guide

Pilot a shift from advertising to discounts in contractions.If your goal is holding brand sales, try it especially for beverages and for value mass brands, which advertise heavily at low prices. The study did not test the shift directly. Keep advertising your food brands.
Maintain advertising for your premium mass brands in contractions.These brands advertise heavily at high prices. Advertising lowers their price sensitivity, giving you less reason to cut it or lower their prices.
Ask your analytics team to report same-month and long-term responses separately.Get both before you approve budgets, because the differences across economic phases appear in long-term responses.
Check each contraction plan against competitors' price cuts.Before you approve pricing, have your team estimate how your brands' long-term sales respond to competitors' prices.

Evidence

Price sensitivity is the percent change in sales for a 1% price change. At the May 2009 trough of the global financial crisis, the model puts long-term price sensitivity about 14% higher than at the November 2007 peak. Same-month responses to price and advertising show no clear change across the cycle.
Advertising effectiveness is the percent change in sales for a 1% advertising change. Long-term advertising effectiveness rises in expansions, when packaged-goods base sales tend to weaken. At the May 2009 trough, the model puts it approximately 60% lower than at the November 2007 peak, though the drop tied to contractions is not reliably different from zero.
Contractions show no clear effect on average base sales and can bring sales opportunities. But brands' long-term sales become more vulnerable to competitors' price cuts.
Product classes differ markedly. From the November 2007 peak to the May 2009 trough, beverages' long-term price sensitivity rises about 27% and their advertising effectiveness falls about 76%. Food brands keep comparatively high advertising effectiveness.
Value mass brands show the largest absolute rise in price sensitivity from peak to trough. For premium mass brands such as Coca-Cola, advertising still helps sales indirectly by lowering price sensitivity.
Over 1993-2010, same-month price sensitivity grew, while advertising effectiveness did not decline appreciably.

Key takeaway

Long-term sales are more sensitive to price in contractions and more responsive to advertising in expansions.

Limitations

The data cover 150 mature U.K. national packaged-goods brands in 1993-2010 and measure sales response, not profit or shelf space. They include rivals' prices and advertising but not rivals' reaction to a budget shift.

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, 50(2), 177-193. https://www.rug.nl/research/portal/en/publications/price-and-advertising-effectiveness-over-the-business-cycle(7ab91945-ca76-447a-aa5c-b582dd0407da).html.

Exact values behind the rounded figures: long-term price response -.7863 to -.8956 and advertising response .0218 to .0088 at the November 2007 peak versus May 2009 trough; beverage price response -.9483 to -1.2096 and advertising response .0251 to .0059; food price response -.8786 to -1.0101; Figure 6's household care price responses -.97 and -.96 and personal care responses -.52 and -.57.