Go With the Flow:
“
The Effect of Pro- and Countercyclical Advertising and Pricing
Strategies on the Resilience of CPG Brands”
Introduction
› Problem: Managers find it difficult to deal with the
impact of economic downturns.
Of 5000 studied companies:17% did not survive during three
recessions and 80% not fully recovers in the next three years.
Managers have to adopt to the new situation fast and under
increasing pressure when the crisis hits.
› Solution!?: Creating resilient organizations.
Resilient organizations possess the ability to cope with (unexpected)
adverse events better, and recover faster.
However: Research mainly focusses on time-consuming changes and
Research Question
› Advertising and Price are easier to modify
Managers already modify marketing instruments in reaction to economic
downturns.
Managers are able to use these instruments, so why should they not use
it to create resilient organizations?
› To what extent do pro- and countercyclical advertising
and price affect brands’ resilience to macro-economic
business cycles in terms of sales?
Resilience
› The organization’s ability to cope with adverse events.
Mitigate impact
Recover from impact
› Conceptualized along three dimension:
Downward risk
Upward potential
Steadiness
Van der Vegt et al. (2015) -0.04-0.03
Business Cycle Related Advertising and
Pricing Strategies
› “A cycle consists of expansions occurring at about the same time in many economic activities, followed by similar general recessions, contractions and revivals which merge into the expansions phase of the next cycle.” – Burns & Mitchell (1946).
› Many managers increase advertising investments in expansions and decrease them in contractions (= Pro-cyclical).
› Recent research suggests that countercyclical advertising behaviour might increase performance.
› Some managers price pro-cyclical to gain competitive advantage, others countercyclical to compensate for the loss in sales during contractions.
Data
› Monthly data of 75 UK brands spread over 17 mature
CPG categories between 1993 and 2010.
In four different product classes: food, drinks, personal care, household care.
Method – Five steps:
1. Deriving the cyclical component of the advertising, price and sales
series.
2. Determine downward risk and upward potential.
3. Determine the steadiness of sales.
4. Extract the co-movement of price and advertising investments
with the business cycle.
Conclusion & Discussion
› Pro-cyclical advertising in contractions lowers the brands’
ability to recover, whereas countercyclical advertising in
contractions strengthens this ability.
Being already in the consumers mind when others start advertising in
expansion.
› Pro-cyclical pricing during contractions positively affects
the brands’ ability to mitigate the adverse impact of the
downturn.
Consumers become more price-sensitive in contractions.
› Steadiness not affected at all by both advertising and price.
Might be caused by the S-shaped function of price and advertising
Managerial implications
To make their organizations more resilient managers should:
› Increase (or at least less decrease) advertising
investments in contractions to strengthen the brands’
ability to recover in expansions.
› Lower prices (or at least less increase them) during
contractions to strengthen the brands’ ability to mitigate the
negative impact on the sales.
Limitations
› Only brands in mature CPG categories are studied.
Less mature CPG categories characterized by higher advertising sensitivity
(Allenby & Hanssens, 2005)
Other product categories (e.g. durables) might be affected differently.
