Hysteresis in Marketing -- A New Phenomenon?

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When a cigarette company lowered its price per pack, its sales exploded. Even after competitors retaliated by cutting prices, the market shares stayed the same. After a pharmaceutical company set its prices above the government-established reimbursement amount, it lost ten market share points. Three weeks later, management cut the price to the reimbursement level. The company never regained market share, despite the lowered price. The marketing effect in both these cases, says Simon, is hysteresis, a phenomenon in which a temporary change in one factor causes a permanent change in another. It can work positively, so that sales remain at a higher level despite competitors' responses. Or it can work negatively, so that the lost sales position is never recovered.

From five case studies and a survey of executives, Simon determined that hysteresis not only occurs in marketing but has managerial implications. In each case — West Cigarette, Sigma Pharmaceutical, Ehrmann Dessert, Southwest Airlines, and Wodka Gorbatschow — he found evidence of permanent change in sales or market share that resulted from a temporary change in marketing stimuli. Factors such as public attention, press coverage, and, most importantly, price changes combined to create the hysteresis phenomenon.

Simon reaches several conclusions: a strong shock in marketing stimuli or an unusual situation produces hysteresis; changes in several marketing instruments combine to cause hysteresis; price drives the phenomenon, while advertising alone is unlikely to generate it; an innovative use of a marketing variable may lead to hysteresis; and a delayed reaction by competitors may raise the probability that hysteresis will occur.

Can managers control hysteresis in marketing? According to Simon, while companies cannot fully plan for it, they must be aware of the conditions that foster it. They can spot favorable conditions early and take an unusual innovative action to surprise the competition. Managers can also prevent a company from being a victim of hysteresis by monitoring the market so they can react quickly. The pharmaceutical company waited too long to lower its prices; after one month, negative hysteresis had already occurred.

Hermann Simon is chief executive officer of Simon, Kucher & Partners, strategy and marketing consultants, in Cambridge, Massachusetts, and Bonn, Germany, and a visiting professor at London Business School.

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