Adaptive Spending in an Economic Crisis: Segmentation by Adaptation Patterns

There exists a very limited academic research base regarding consumer behavior in economic crises. Consequently, important lessons have either not been learned or have been quickly forgotten. Baker (2009) attributes the dearth of recessionary research in marketing to ‘research myopia’, specifically, that marketers tend not to perceive similarities between present events and past experience. However, though some consumer adaptations are transient, research suggests many more endure economic recovery (e.g., Lamey et al. 2007). The limited research base that does exist has several fundamental limitations. These include a focus on very broad categories of products and services (e.g., McDaniel et al. 1986); a tendency to measure changes at only one point in time during what are very turbulent phenomena (e.g., Ang 2001); and, analyses that focus on aggregate change rather than on a spectrum of adaptive responses (e.g., Zurawicki and Braidot 2005). Based upon these limitations, this research seeks a more robust understanding of how consumers adjust their spending patterns during an economic crisis. The researchers build hypotheses regarding the types and causes of spending adaptations, likely consumer differentials in adaptive behaviors, and the dynamic nature of consumer adaptations over the course of an economic crisis. A mixed method research design was employed. An online panel company was employed to administer a questionnaire survey in September 2008 (n = 1205) and September 2009 (n = 1177). Both samples are representative of the Great Britain population in terms of income, gender, age and region. The 2008 survey was conducted a time where the crisis was approaching its nadir, whereas the 2009 survey was conducted as the economy was about to leave the recession. To measure changes in spending patterns, respondents were asked the extent to which they changed their spending on 27 product-types, plus scales of economic confidence and other relevant measures. Focus groups, each with 7+ retail/brand managers, were conducted before and after both of the surveys,to explore the congruity (or lack thereof) between the actual changes in consumer spending during this period and the marketing strategies actually adopted by retail firms during this period. Principal components analysis identified four categories of adaptations: food staples; major products/services; discretionary food items; and non-foods. Differences between these categories relate to the magnitude of change, the causes of these changes and fluctuations during the crisis. Food staples were the least negatively affected category and exhibited no significant changes between 2008 and 2009. Conversely, there is a less negative decline in spending on majors in 2009 but the cutbacks in spending on discretionary foods and non-foods were greater in 2009 than in 2008. Regression models indicate that not only do consumers curtail their spending to differing degrees across the four categories, but also these spending differentials reflect different barriers to spending. For example, unlike for discretionary foods, the increased cost of living is a poor predictor of changes in spending on food staples. Cluster analysis wasbased on changes in spending across all 27 major and non-major categories. The K-means clustering procedure, with multiple iterations, produced a customer typology of relevance to retailers, manufacturers and researchers. While existing studies emphasize the aggregate decline in spending during crises, a salient finding here is that almost half of all respondents - the modest changers - actually make very minor adjustments. Moreover, a significant minority actually reported spending more than they did before the recession. These results have significant theoretical and managerial implications. Importantly, they suggest that marketers must be wary of focusing their adaptive strategies towards one specific cluster – specifically the maximum adaptors. Illustratively, excessive price promotions may not reflect most consumers’ actual ability and willingness to pay, contributing to a self-fulfilling vicious cycle of spending cuts. Further, the results demonstrate that consumer adaptations in recessions are neither static nor consistent across product categories. These specific results have implications for the debate concerning whether marketing strategy should be proactive or reactive during an economic crisis. Given the changeability and volatility in consumer behavior, expensive, proactive marketing efforts initiated prior to or at the onset of a recession may become inappropriate as conditions change and governments intervene. Though proactive marketing may indeed provide early benefits for retailers through first mover advantage (Srinivasan et al. 2005), it is a potentially risky strategy. This study provides some support for Grewal and Tansuhaj (2001) who assert that, due to the unpredictability of how crises develop, firms should pursue reactive strategic flexibility. While most firms have the capacity to be flexible, as reflected in dynamic promotional cycles and range changes, this should be used sparingly. Excessive changing of product offerings, prices and communications may dilute brand meaning and a potentially perplex, even alienate target audiences.