Marketers have to understand the environmental factors that can affect a marketing plan. The economy has a dramatic impact on a marketer's overall strategy for pricing, product development, promotion and logistics.
Companies need to understand the total marketing environment when developing a plan of action. Let's look at the economic section of the marketing environment and how consumers and industry react to the economy. The five parts of the economic environment that are important to marketers are consumer incomes, financial power of women, purchasing power, inflation and recessions.
The Testa family of Lancaster, Pennsylvania, has to pay bills, mortgages and car payments every month. The result is that much of their money is gone before the month's end. Marketers are most interested in consumers' disposable income. This is the amount of money left after taxes. Education is the biggest indicator of the amount of disposable income a consumer will accumulate. It will determine their earning potential. US incomes have not increased much, and this has resulted in steep competition for marketers to acquire a consumer's disposable income.
Level of education is the top indicator of how much disposable income a consumer will have.
The Testa family likes to spend money on technology, clothing and travel. Unfortunately, due to the poor economy, they have had to eliminate their vacation. Since the family is feeling financial pressure, Mrs. Testa has decided to go back to work. This leads us to our second piece of the economic landscape that is important to marketers.
Financial Power of Women
Mrs. Testa has an MBA and worked full-time before she had her three children. With her husband unsure of his job stability, she has decided to go back to work. Recent statistics show that women bring in half or more of the income in most homes within the United States. This is a very important economic trend for marketers to be aware of, as women have more purchasing and decision-making power. In addition, women have become the primary purchasers of a number of items, including computers, new cars and consumer electronics.
Mrs. Testa actually handles all of the financial investment and home improvement decisions for the family. Smart marketers have already reached out to Mrs. Testa through direct email on investing and promotions for upgrading her kitchen appliances. Mrs. Testa did find a very lucrative job offer, but unfortunately, it is in the New York City area. The family now must determine if it's worth moving.
Purchasing power is the comparison of income to cost on specific items from different geographical areas. It is also known as income minus the cost of living. The Testa family is currently comparing what it would cost to move to New York City or stay put in Lancaster, Pennsylvania. Unfortunately, New York City is known to be on average three times more expensive than most of the country. Even with the higher salary offer, Mrs. Testa has decided to turn down the offer, since the cost of living would be too high. For example, their mortgage would increase from $2,000 a month to $4,000 a month, and they would be living in an apartment.
Marketers are interested in targeting those consumers who have a large amount of purchasing power. These types of consumers have extra money to spend on products and services and still make their monthly budget. They also have the ability to buy more expensive homes, cars and clothing. If the Testa family had moved to New York City, they would have had to cut their spending back even more. The companies that sold products to the family would have noticed a decrease in their bottom line.
One of the main reasons Mrs. Testa is looking for work is due to inflation. This is when there is a decrease in the value of money. For example, $2.96 used to buy a gallon of milk for the family. Now, a gallon of milk costs $4.96. The inflation is occurring with all categories, including food, gasoline, clothing, etcetera. Since the Testa's income is not increasing, it also is causing them to decrease their purchases.
Companies adapt to inflation by decreasing product size while maintaining the same price.
Marketers can adapt their pricing during inflationary times. The biggest way marketers try to hold prices the same during inflation is to shrink the package size or amount of the product. For instance, the peanut butter the kids eat still only costs $2.99 a jar. However, the marketing team shrank the size of the jar slightly, so now for $2.99, Mrs. Testa is only getting 14 ounces instead of 16 ounces of peanut butter. The Testa family is struggling to find a way to keep their budget intact. The economy is not improving at all.
Unfortunately, on top of all of the other financial troubles facing the family, a recession is now affecting the entire country. A recession is a time period of economic activity where there is negative growth and demand for goods and services decline. The Testas have drastically cut back their spending, as did thousands of other families in town.
Marketers can also adjust their marketing plans during a recession. They tend to improve existing products to cut down on developmental costs. Also, any marketer that creates a new product that helps consumers save money will likely succeed during economic hard times. During a recession, many people and businesses cannot afford to purchase new items. This causes a drain on companies' customer service and repair services. It's important for companies to ramp up their customer service and repair divisions during a recession.
Marketers also must focus on value during a recession. Since consumers have less money to spend, they want reliable, efficient products and services. For example, the Testa family purchased a more expensive SUV recently, but they felt that the added expense of a well-reviewed vehicle would provide safety, dependability and value in the long term.
The marketing environment consists of technological, political, social, demographic, competitive and economic. The economic environment is important for marketers to understand their consumers purchasing power and disposable income. Marketers are most interested in consumers' disposable income. This is the amount of money left after taxes. A recession and inflation are two economic events that can have enormous effects on consumers. Inflation is when there is decrease in the value of money. Recession is a time period of economic activity where there is negative growth and demand for goods and services. There are ways for marketers to alter their plan during economic changes to still reach target markets.
After watching this lesson, you'll be able to list the five factors that make up the total marketing environment, and explain how marketers can adapt their marketing strategies to changes in each of these five factors.