The Price Of Recession Discounting

Last week I asked for some feedback about the recession topic we discussed on the BeanCast. To remind you, the recession apparently ended in June of 2009. (Yeah, right.) So I was looking for some perspective on the topic.

What I got, though, was some insightful commentary from Karen Tabaka (here's a link) to an expanded version of these comments in the forum) that took me in a whole different direction and made me realize that the reason the recovery continues to lag is probably a result of our own marketing foolishness. And I also realized that I had called this very thing out a year or so ago on the show and in several blog posts, including this one.

I won't repeat everything she said. You can read that for yourself. But one particular points stood out for me: There are two groups of people — the lesser portion of the population that have been affected by layoffs and economic hardship and the greater part of the population that remain employed and have no comprehension of the hardship, but have now become accustomed to discounts.

And that's the rub. We talked about it on the show. The experts wrote about it in Ad Age and other trade journals. Folks discussed it on Twitter. For the last year we've been saying that discounting at the expense of brand investment will always hurt a brand in the long run. Now we're seeing the proof.

Just think about it. The recession hit and everybody, whether they had a job or not, pulled back spending in fear. If folks didn't loose their jobs, they were afraid of losing their jobs and everyone got gun shy about big purchases. So most retailers and manufacturers, acting in desperation, started discounting in order to woo people back to the stores. For the most part it worked. Folks operated at a reduced profit, but the healthy operations managed to keep product rolling off shelves. Trouble is, now that the recession is over, all this marketing to the lowest common denominator — the lesser part of the population that was really out of work and really on hard times — dragged the rest of the population down with it. It may take years (if ever) for brands to increase profit margins back to pre-recession levels. 

Now let's turn to my favorite example, Apple, and we see a different story. They didn't discount. They didn't pull back brand spending. One could say that they may have even ramped up branding efforts and product introductions. And while it's true to say that not every brand is as cool as Apple, my retort is, "Why not? Why can't every brand be as cool as Apple?" Let's face it, Apple makes computers. Computers are a commodity item now. Yet Apple makes them special. They make them cool. So why can't other commodity operations do the same?

The drive for immediacy in terms of profit, rather than long term investment in brand position has left far too many companies exposed to economic risk. So when the recession hit, these lackluster branding efforts revealed themselves as less than useless and all that was left for survival were discount tactics. Which, of course, just served to exacerbate the situation in the end.

Karen's point about the two groups hammers home that knee-jerk responses to advertising are foolish. In this case, everyone was affected by recession news, but the greater portion of people still had money to spend, as Apple proves time and again. So brands pulling back on ad spends in favor of discounting ended up creating a short-term fix that ignored the huge potential that was out there. It was like the investor who pulls his mutual fund at the first sign of downturn, only to watch the market come back without him. He saved some short-term losses, but he missed out on the long-term gains. Some investments are meant to be slow, steady and long-term and branding is one of those investments.

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