Managing Product-Harm Crises

Product-harm crises are among a firm’s worst nightmares. Since marketing investments may be instrumental to convince consumers to purchase the firm's products again, it is important to provide an adequate measurement of the effectiveness of these investments, especially after the crisis. We provide a methodology through which firms can assess the impact of product crises in a quantitative way. Based on the model estimates, firms can estimate the required level of investment to recoup from the crisis. A key finding of this paper is that it is not only important to assess the extent to which business is lost as a result of the crisis, but also to find the new, postcrisis response parameters to marketing activities. The study of an Australian product-harm crisis for peanut butter reveals that a product crisis may represent a quadruple jeopardy for a firm: (i) loss of baseline sales, (ii) a reduced own effectiveness for its marketing instruments, (iii) increased vulnerability, and (iv) decreased clout. We arrive at this conclusion by using a time-varying error-correction model that allows for (i) shortand long-term marketing mix effects, (ii) intercepts and response parameters that change over time as a result of the crisis, and (iii) missing observations, which result from the absence of the impacted brands during the product-recall period. The time-varying error-correction model is applicable to other marketing-research areas in which these three requirements (or any subset thereof) apply.