To Launch or not to Launch in Recessions? Evidence from over 60 Years of the Automobile Industry
M. Berk Talay, Koen Pauwels, and Steven H. Seggie, 2012, 12-109
The National Bureau of Economic Research estimates that in the United States, recessions occur on average every six years, and are particularly impactful on firms, industries, and the economy. While the extant marketing literature has started to address how recessions affect firm decisions and customer response regarding advertising, prices, and branding, it has had little to say about new product success in recession versus boom times.
Do new products have higher chances when launched during a recession? By comparison, how do products launched in boom times fare during the recession? In this report, Berk Talay, Koen Pauwels, and Steven Seggie investigate these questions in the context of the U.S. automotive industry, using data on 1,071 models launched between 1945 and 2008. They propose and test hypotheses that customer, competitive, and company management factors at the time of launch form initial conditions that continue to affect the new product’s success in the market.
The U.S. automotive market offers an ideal research setting. First, consumers are especially likely to postpone or cancel purchases of expensive durable goods in recessions. Second, many domestic and foreign firms compete in the U.S. automobile market. Third, new products are particularly important in the U.S. car market, as they increase long-term firm financial performance and firm value. At the same time, new products are very costly and tough to manage. In sum, the opposing forces of low consumer interest, competitive clutter and company innovation management should manifest themselves in this market. Further, the 64-year observation period covers all of the post-World War II economic recessions in the U.S. economy, with varying durations and levels of contractions, allowing for a rigorous and precise analysis of the link between new product launches and contractions.
The authors’ analysis demonstrates that products launched during a moderate recession have higher long-term survival chances compared to the average newly launched product. This benefit endures even after controlling for quality, which is higher for products launched in a recession. New products launched immediately after a recession fare better than those launched later. Beyond launch, there is a U-shaped relation between model age and survival: once a model survives the first years, its survival chances improve up to 22 years in the market, after which they decline.
Proactive marketing in a recession leads to improved business performance. Instead of cutting back on new product launches during recession, firms should continue (and perhaps even increase) new product activity. This finding goes against the common wisdom of many companies that cut back on product launches during recessions in the hope that they can outpace their rivals in boom times.
Reduced competitive activity during a recession will also provide opportunities to have more impactful product launches. Firms that intensify their R&D activities, prepare a new product pipeline, and update their product mix prior to the beginning of an economic recovery can enjoy first-mover advantage. The longer the firm waits to launch new products, the more clutter exists in the market and the more challenging it becomes for firms to make successful product launch.
The severity of the recession presents a boundary condition to the benefits of increasing marketing activity during a recession. Product survival chances are substantially lower when it is launched in a severe recession. This implies that managers should carefully monitor macro-level economic activity and integrate existing and prospective conditions into new product launch strategies. Interest rates, oil prices, inflation, rising bankruptcies, consumer spending, treasury spread, and yield curve might be used as indicators of an imminent recession and its depth. When these indicators start to presage a downturn, managers should carefully consider which new development projects are likely to be relevant to consumers in the upcoming recession.
M. Berk Talay is Assistant Professor of Marketing, University of Massachusetts, Lowell. Koen Pauwels is Professor of Marketing and Steven H. Seggie is Assistant Professor of Marketing, both at the Graduate School of Business, Ozyegin University, Istanbul, Turkey.
Related linksLong-term Performance Impact of New Products and Promotions in the Auto Industry
Koen Pauwels, Jorge Silva-Risso, Shuba Srinivasan, and Dominique M. Hanssens (2003) [Report]
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