Research Insights 9.3 Price and Advertising Effectiveness Over the Business Cycle

Price and Customer Value Decisions

Source:Van Heerde, H.J.; Gijsenberg, M.J.; Dekimpe, M.G. and Steenkamp, J-B.E.M. (2013). Price and advertising effectiveness over the business cycle. Journal of Marketing Research, 50(2) 177-93.

Abstract: Firms are under increasing pressure to justify their marketing expenditures. This evolution toward greater accountability is reinforced in harsh economic times when marketing budgets are among the first to be reconsidered. To make such decisions, managers must know whether, and to what extent, marketing's effectiveness varies with the economic tide; however, surprisingly little research addresses this issue. Therefore, the authors conduct a systematic investigation of the business cycle's impact on the effectiveness of two important marketing instruments: price and advertising. To do so, they estimate time-varying short- and long-term advertising and price elasticities for 150 brands across 36 consumer packaged goods categories, using 18 years of monthly U.K. data from 1993 to 2010. The long-term price sensitivity tends to decrease during economic expansions, whereas long-term advertising elasticities increase. During contractions, the long-term own and cross price elasticities increase. Moreover, throughout the observation period, the short-term price elasticity became significantly stronger. Finally, patterns differ across categories and brands, which presents opportunities for firms that know how to ride the economic tide.

 

Insight: This article considers whether or not marketing activity (specifically pricing and advertising) is affected by the economic cycle (e.g. expanding economy versus contracting economy). The authors estimate short- and long-term advertising elasticities and price elasticities for 150 brands across 36 consumer packaged goods categories, using 18 years of monthly UK data from 1993 to 2010. They conclude that during economic contractions, consumers are less responsive to advertising and react more strongly to price reductions. Generally, the authors suggest reallocation of marketing expenditure from advertising to price discounting, but only if the firm’s objective is to maintain sales (as opposed to profit maximisation). There are differential effects for categories and even brands within categories, e.g. advertising elasticity is high (i.e. more advertising creates more sales) during a contraction for food brands but not for beverages. For premium mass brands, advertising during a recession can lead to greater willingness to pay and reductions in price sensitivity (i.e. people will pay more).  Interestingly, the authors also find that consumer packaged goods firms tend to do less well in an expanding economy as consumers shift spending to out-of-home but return to in-home spending during a contraction.  

URL: http://journals.ama.org/doi/abs/10.1509/jmr.10.0414