-Economic Factors
-Technology and Innovation

[SLIDE 1]

Along with social and demographic factors, the overall economy has a direct impact upon most products and services. While most economic changes will have no direct impact on luxury items, even a small change can increase or reduce the sales of most consumer items.

Economies are complex, but there are four key economic factors to discuss:

-Consumer income
-Purchasing power
-Inflation
-Recession

[SLIDE 2]

Disposable income is the money that can be invested, saved or spent after taxes are paid.

Discretionary income is the money remaining after taxes and required expenses such as mortgage, rent, and utilities are paid.

Marketers must be aware of the difference.

In 2017, the Federal Reserve reported annual Median Household Income at $61,372. However, the median varies a great deal from state to state.

While the medium income is going up as a number, it has fallen since 2009 after inflation removed. One reason is wage stagnation, but another is that Baby Boomers are retiring. That has increased the number of households with zero income from 20% to 25% in the same time period.

While unemployment is low, long term unemployment, those unemployed for 27 weeks or longer, remains higher than before the Great Recession.

Education is also a key factor in income variation. One percent of workers with only a high school education make over $100,000 per year while 13% of workers with a college education earn that much.

Because of the economic factors, the growth of stores focused on low-income workers has grown. Dollar Tree, Family Dollar and Dollar General are the flagships of this movement. Household goods manufacturers such as PG&E have found that even middle-class customers are becoming less likely to buy household products with extra features, turning to store brands and other lower priced alternatives.


[SLIDE 3]

You cannot purchase something if you do not have the income. Taxes and fixed expenses (mortgage, rent, utilities, etc) cannot be avoided. What is left is discretionary income. Purchasing power is what can be purchased with that remaining income.

Purchasing power is directly tied to geography. It is not just rent and utilities that are higher in New York City than in Boise, Idaho. Individual products and services are also more expensive. Of course, many jobs pay more because of those added expenses, but whether or not the higher income is enough to have the same purchasing power requires analysis.

Salary.com is an example of a comparison site that analyzes cost of living, comparing a salary in one area with what you would need to have the same purchasing power in another city. For example, if you make $50,000 in St. Louis, Missouri, you would have to earn $61,135 in Seattle, Washington (at the time of writing) to have the same purchasing power.

[SLIDE 4]

Inflation is a measurement of the decreased value of money. The price of a product changing from $1.00 to $1.10 is a 10% increase. The average change in all prices is the increase or decrease in inflation. 

When inflation is low, as it has been since the Great Recession, the best way for companies to increase profit is to be more efficient and decrease costs, as any significant increase in prices will lower demand. Therefore, marketers try to hold prices as long as possible.

When people have a fixed income, or a wage that does not increase at the rate of inflation, purchasing power decreases so the number of things that can be purchased by a consumer decreases.

Inflation has a strong impact upon demand, so marketers must be careful in price increase decisions.

[SLIDE 5]

A recession is a period of economic activity characterized by a shrinking economy, reducing demand for goods and services. Rather than say "shrink" or "contract", economists typically say "negative growth".

The Great Recession officially began in December, 2007. The definition of the start of a recession is when Gross Domestic Product (GDP) has shrunk for two successive quarters. The US was producing less, leading to layoffs, leading to lowered spending. The recession spread across the globe because the world’s economy is very interrelated.

Marketers must have different marketing mixes for times of growth and times of recession.

[SLIDE 6]

The invention of the automobile devastated the horse and buggy related industries. It also created many other businesses sectors, companies and jobs.

The term "computer" used to refer to people who did calculations. That has also changed.

Technology continues to advance and smart leaders plan for that change, both by hiring people who are adaptable and by constantly looking at the market for new technologies that mean the marketing mix must change.

Royal Dutch Shell (Shell), is a strong example of both. It is an oil company that created The Idea Factory to look at new technologies to enhance business. The Idea Factory has four main pillars:

-Game Changer: “Blue sky” innovation, trying to think of brand-new technologies that can change a market

-Shell Technology Ventures: A venture capital arm to invest in startups around the globe

-Shell Tech Works: Looks at other industries to find technologies that could transfer to Shell’s businesses

-Universities: Collaborate with universities around the world for research and development

There are three ways any company can become involved in technology innovation:

-Research
-Stimulating innovation
-Innovation and employment

[SLIDE 7]

There are two types of research.

Basic research is pure research aimed at confirming an existing theory or to learn about concepts and phenomena. It is the primary type of research found in academia.

Applied research is aimed at using knowledge and discoveries to create new products. This is the primary focus of most companies, linked with the creation of products through the umbrella of Research & Development (R&D).

Basic research is important for understanding the basic concepts and science that can drive innovation.

The US has a long history of strong basic research. Unfortunately, US government spending on basic research has dropped as a percentage of GDP for fifty years. China has surpassed the EU on basic research and a number of analysts think it leads the world in solar power and artificial intelligence.

However, while companies focus on applied research, there are three industries where basic research is important so that companies directly invest in basic research:

-High tech
-Biotech
-Pharmaceuticals

Alphabet (Google’s parent), IBM, Genentech, Bayer, and other companies in that sector spend significant money on basic research in the hope that something will be discovered that can be sent to R&D in order to create a competitive advantage.

[SLIDE 8]

Looking just at the areas a company is familiar with can create incremental improvements, but rarely develops true innovation. Companies look at models such as that of Shell’s Idea Factory and have realized there are a number of potential approaches to innovation:

-Building Scenarios: Teams imagine detailed opportunities and threats for company, partners and collaborators

-Enlisting the Web: The web and social media as sounding boards and a source of ideas for innovation

-Talking to early adopters: Why are the early adopters using the technology? The specifics can help decision making

-Using marketing research: Finding market interests (both existing and potential customers) in your product and those of competitors – and what’s lacking from both

-Creating an innovative environment: Giving employees “freedom to fail” is critical to finding and testing new ideas

-Catering to entrepreneurs: Policies that allow scientists, engineers and others to spend time thinking about new ideas rather than directly focusing on what is in front of them

[SLIDE 9]

The invention of the automobile wiped out most jobs in horse transport related businesses. The telephone ended the telegram. Both innovations, however, created new jobs.

While 84% of executives say innovation is important. That does not mean innovation is good for the workers. Transition means unemployment and change. The automated manufacturing movement was about cutting costs, including labor costs.

The current focus on robotics, machine learning, vision and other aspects of artificial intelligence (AI) is still an open question. It is expected that those technologies will eliminate many jobs. The question is whether or not there will be new jobs that take their place. While some analysts say yes, those new jobs typically take a much higher level of education than the jobs being lost. It is not the same as switching from assembling buggy whips to assembling cars, where training is still needed but where the skill sets are not far apart as working an assembly line and computer programming.

The technology innovation happening now may have a major change on the economic factors mentioned earlier. That means marketing must keep a close eye on the market in order to change the marketing mix as technology changes the market.