-- When faced with job losses, a sudden drop in income, or other stormy economic conditions, consumers will likely need to shift their purchasing priorities and preferences. Those changed preferences outlast the contraction and shape choices even after income recovers.
In a series of studies, Penn State Smeal College of Business-led researchers say that consumers may not return to their original spending patterns even after those gloomy economic clouds finally clear up. The findings suggest that, despite their own tight budgets, businesses should continue to reach customers during uncertain economic times, or face negative consequences that stretch beyond the contraction.
The studies build on work seeking to understand how consumers behave in uncertain economic conditions, said Gretchen Ross, a former Penn State Smeal doctoral student in marketing and currently an assistant marketing professor at Texas Christian University.
"There's this idea that when we have an expanding budget trajectory, we tend to add more categories to the budget, then when we have a decreasing budget trajectory," said Ross, who was the first author of the paper. "In other words, we spend on more categories on the upward, than the downward. So, we started thinking what happens when you experience a contraction in your budget, but then are able to go back to your original state? For example, what would happen if you lost your job and needed to cut some budget categories, but then you find a new job and go back to previous income levels. Would we go back to spending our income on the same categories?"
According to Ross, consumers typically shift their priorities and preferences during the contraction and those shifts persist after resources are restored. Further, these shifted preferences may be more stable than initially thought.
"As an example, if your income increases, you might start buying fine wine instead of boxed wine," said Margaret Meloy, professor of marketing and Calvin E. and Pamala T. Zimmerman Fellow, who also serves as the Marketing Department chair. "However, when your budget constricts, going back to boxed wine may feel so aversive that it makes more sense to stop buying wine entirely. In other words, consumers might cut out entire categories of consumption during contractions. When economic resources return, consumers may continue to skip the wine because they have discovered they weren't enjoying it that much in the first place," she added.
Judicious marketing
The researchers, who published their findings in a recent issue of the Journal of Consumer Research, one of the top journals in its field, suggest that companies need to watch marketing budgets closely during these contractions.
"You have to prevent your brand from ending up on the cutting room floor when budgets contract," said Meloy. "If your brand disappears during the contraction, there's a lower probability that it will return as budgets re-expand. During an economic downturn, it may not be a time to cut your marketing budget; you may want to spend it judiciously on those most likely to cut your brand during the contraction."
Ross said that companies should also look for ways to help customers manage times of economic struggles.
"There may be ways that companies could help customers during this time," said Ross. "For example, let's say I'm experiencing a financial contraction, it's not that I don't want to go to Starbucks for a coffee, I just can't afford it. Perhaps Starbucks could help me by giving me coupons, that might help me stick with the company."
The researchers conducted several experiments to show that the effect stretched across other domains including time, space and money.
To test a loss and return of resources of time, the researchers recruited 119 people to test how their responses to how they would budget time in a travel scenario. They were asked to allocate time for an original itinerary and then later asked how that itinerary would change if it was shortened and then restored.
Similarly, the researchers recruited 123 participants to explore a loss and restoration of space resources. In this scenario the participants were asked which vegetables they would plant in a garden of 21 rows and then which they would plant it if the space was contracted to seven rows. They were then asked about their plan when the garden was eventually restored to its original dimensions. Did individuals decide to leave some of the vegetables in the initial allocation out of the final allocation across the 21 rows?
To test financial resources, the researchers recruited 223 participants to manage a $300 budget that was cut to $100 and then eventually restored back to $300.
"In every domain that you can show a robust effect, it indicates there's something fundamental to the way you're forming preferences," said Meloy.
The team recruited 178 participants for a follow-up study, referred to as a consequential choice study, that tested the preference-forming effect with real resources -- in this case, candy.
Finally, the researchers investigated the preference selection of people who faced a real-world example of contraction during the 2018-19 government shutdown.
The researchers said future work may look at how resource contractions affect the saving patterns of consumers once resources are restored. Do people save more after experiencing a contraction? Another area of research might be to investigate whether preference refinement affects choice satisfaction. For example, researchers could examine how budget contractions during the COVID-19 pandemic may alter satisfaction with a simpler lifestyle that lasts after the pandemic ends.
