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When Will Demand Return?
Strategic Preparation for 2010

December 2009 Pricing

The Great Recession of ‘08-‘09 gave us reduced order volumes on top of cancelled existing orders.  From this maelstrom of vanishing demand followed painful strategic reviews and reductions in force.  Firms cut, sometimes beyond the fat and into the meat, leaving little more than a skeleton of a firm.  Now, a general consensus is forming that the worst of the Great Recession is over, yet the future is still fraught with uncertainty.

Is it time to start hiring and re-investing in the business?  Should an executive cut even further given the low level of demand?  Or, even worse, is it time to close-up shop and look for greener pastures?  There is no single answer to this quandary.  But, if we ask the right questions, perhaps we can uncover the right answers.  In business, the right questions usually start with customers.

During the Great Recession, customer behavior changed in one of five ways:  (1) Exited the market, (2) Postponed Purchases, (3) Reduced Purchases, (4) Shifted to Lower Value Propositions, or (5) Increased Category Selectivity.  Each of these customer behaviors implies a different strategic approach.

Exited the Product Category

Some customers simply stopped buying from the product category.  For instance, ZipCar, a car sharing organization, is reporting an increase in new memberships in the Chicago area.  Each ZipCar takes 15 to 20 cars off the road.  Hence, the growth of ZipCar’s membership represents a permanent reduction in demand for personal automobiles.  Some customers of automobiles have simply exited the market and will not be buying cars in the future.

Some customers of industrial goods may have closed-up shop, implying that they also exited the product category.  If these customers cannot be replaced with new entrants into that same product category or with increased demand from other industry participants, then the firm is facing a permanent decline in demand.

This is the absolute worst case scenario if you are a supplier to that category.  It implies that the market has shrunk permanently and has perhaps even reached the end of its product lifecycle to face continual decline. Strategies for firms facing declining markets are very different from those which might face a recovery.

Postponed Purchases

Some customers postponed their purchases.  For instance, during the Great Recession, many customers of washing machines and dryers delayed their purchase until they feel more comfortable regarding their future earning potential.  It can be anticipated that, once they feel more comfortable, they will return to the market.

For most durable goods, in both industrial and consumer markets, customers have simply postponed purchases.  At some point in the future, customers will need to buy more earth moving machines and washing machines because people need to make new buildings and clean their clothes.  When demand returns, it is likely to be a lopsided growth period.  Demand will suddenly pick up, allowing suppliers a period of increased prices until further production capacity comes on-line or new competitors enter.

Companies whose customers have postponed purchases have two strategic responsibilities at this point: (1) ensure their own survival by making financially sound arrangements to persist, and (2) continue sales and marketing communications to announce to their customers that they are ready to meet their needs when they return to the market.

Reduced Purchases

Some customers simply reduced their purchases from the category.  For instance, during the Great Recession, families decreased their dinning out experiences in favor of cheaper fare made at home.  Similar claims can be made with many impulse purchase situations. It can be anticipated that, once the market recovers these customers will return.

Many consumable goods are facing reduced demand from their customers due simply to fewer purchases.  Like the case of postponed purchases, the demand can be anticipated to return in the coming period of renewed growth when customers have simply reduced purchases.  Unlike the case of postponed purchases, the growth in demand from customers who reduced purchases will more closely follow the overall growth of the economy.

Companies whose customers have simply reduced their purchasing should focus on the strategic issue of maintaining profitability while preparing for a return to a more healthy demand.

Shifted to Lower Value Propositions

Some customers continued to purchase from the product category, but accepted a deprived value proposition in favor of a lower price point.  The launching of Tide Basic is fundamentally an acknowledgment by Procter and Gamble of the need to capture customers at a lower price point with a “good enough” product.  Similar examples can be found in the reported healthy revenues from the Old Navy line of Gap Inc., or in the increased demand for Campbell’s Soup.

The shift to lower value propositions is found in both consumer markets and industrial markets.  The shift rose during the Great Recession simply due to reduced income of both families and corporations.  Once income increases, demand for higher value proposition may or may not return.

The strategic challenge for companies facing a demand shift towards a lower value proposition is one of defining the threat of lower-value propositions.  Would a competitor who provides a lower quality / lower price product be able to use this position to later threaten the firm at a higher quality / higher price position?  Will customers return to seeking quality over price once the recession is over or will they learn that a “good enough” product meets a sufficient number of their needs to warrant abandonment of a higher quality offer?  If so, then the firm may need to re-evaluate its value proposition.  New products take time to develop.  Product managers should be evaluating this threat.

Increased Category Selectivity

For some product categories, unit volume demand decreased overall but the demand expressed is for higher value goods.  For instance, customers may choose to purchase less chocolate overall, but when they do purchase chocolate, they choose to purchase specialty chocolate.  In this case, customers have simply become more selective.

On a household or company budget level, many customers have become more selective in their spending.  They will have reduced their purchases or shifted to lower value propositions in some categories, but in other categories they continue purchasing high value products.

When customers become more selective in their choice to interact with a category, the firm should likewise become more targeted in their marketing communications.  Rather than trying to get marginal purchases, the firm can concentrate on providing the best experience to the customers who are participating with the category.

Key Issue:  What Does the Customer Value?

The underlying question upon which each of the expressions of customer demand hinges is one of value from the perspective of the customer.  Does the customer need what the company makes?  Is the firm solving a real problem for the customer?  Are customers willing to pay for it?  And, what is the urgency in their purchase decision?  If executives can’t answer “yes” to each of these inquiries, then it is time to ask the right kinds of questions.



About the author

Tim J. Smith, PhD is the Managing Principal of Wiglaf Pricing, and an Adjunct Professor at DePaul University of Marketing and Economics. His most recent book is Pricing Strategy: Setting Price Levels, Managing Price Discounts, & Establishing Price Structures.

Tim J. Smith, PhD
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