Marketing Budgets: Why They’re the First Cost Cut, and Why They Should Be the Last
Whenever a recession or any kind of economic downturn hits, consumers and companies alike become more cautious with their money. Customers aren’t buying as much, which means that businesses have to find costs to cut to stay afloat. And since the customers aren’t buying, the thinking goes, why not cut advertising expenses?
Statistics demonstrate how big a negative effect a recession can have on advertising. For example, in the first quarter of 2009 (right after the 2008 downturn), ad spending in the U.S. fell by a whopping 10 percent. Yikes!
But what the statistics also show, and what many business owners don’t immediately realize, is that continuing to invest in marketing and advertising (including promotional products!) during a recession actually tends to benefit a business.
What Makes a Business Owner Cut Marketing Costs
We all know what the basic answer to that is. The business doesn’t have as much money coming in, but the bills still have to be paid and the accounts settled. Therefore, a business owner will think about cutting costs in order to continue operating.
But why reduce the advertising or marketing budget first? It isn’t just because, for most businesses that aren’t ad agencies, marketing is a function that’s secondary to what the business primarily offers, whether that’s clothing or food or even a service like a haircut. Plenty of other reasons for putting the marketing budget up first on the chopping block have been suggested. After all, it’s not as if a brand’s social media presence will disappear overnight, or a company’s customers will suddenly forget all about it after years of marketing. Companies have some leeway when the economy gets tough.
Even with those justifications, however, scaling back ad dollars is recommended only as a temporary solution. Not only will those customers eventually forget if a company doesn’t work to keep its name out there; as research suggests, a recession might actually be the best time to advertise.
What the Evidence Says About Reducing Ad Spending
An economic downturn affects businesses at almost every level of profitability. Even companies that are successful can expect to see lower profits than they did when the economy was healthy.
What’s interesting, however, is that cutting ad spending during a recession hasn’t been shown to make companies any more profitable. In 1990, advertising guru Stephen King (not to be confused with that Stephen King) published a paper that demonstrated that “…businesses that cut their advertising expenditures in a recessionary period lose no less in terms of profitability than those who actually increase spending by an average of 10 per cent.” According to King, reducing ad spending doesn’t help the bottom line.
In fact, according to another study, reductions in ad spending may have actively hurt companies in the past. Buchen Advertising’s look at data from the 1949, 1954, 1958, and 1961 recessions suggested that companies that advertised less during those periods not only saw fewer sales and lower profits – they also experienced less growth than their competitors in the years after the recessions. A look at data from the 2008 recession suggests that companies had a hard time regaining their market share after that one as well.
As if the potential loss of profits wasn’t enough, there’s also the flip side to consider. That’s right – numerous studies and anecdotes suggest that advertising when the economy is bad can lead to growth:
• During the Great Depression, General Motors pioneered the use of outdoor billboards and radio to advertise its budget brand, Chevrolet. Although Ford had been a leader in the automotive industry for years, by 1931, Ford was consistent being outsold by Chevy.
• According to a study of the 1974-1975 recession from American Business Press and Meldrum and Fewsmith, “[c]ompanies which did not cut marketing expenditures experienced higher sales and net income during those two years and the two years following than those companies which cut in either or both recession years.”
• According to McGraw-Hill Research’s look at the 1985 recession, companies that either maintained or increased their ad budgets during that time experienced a 256 percent increase in sales versus companies that cut their ad budgets. Yowza!
• And according to a 1990 study from the WPP Group’s Center for Research and Development, companies that increased their ad spending by 20 to 100 percent saw an average gain of 0.9 percent of the market share, while those that cut spending only gained 0.2 percent of the market share.
What these examples suggest is that when companies continue to advertise during a recession, they keep their names in the minds of consumers, so that when customers do have money to spend, they’re more likely to turn to the brands they readily remember.
Of course, there are some other numbers, like the 2002 analysis that suggested that companies that increased ad spending during the 2000-2001 recession saw no uptick in profits, most likely because everyone increased their ad spending.
So what are the best ways to stand out, justify your marketing budget, and find a good balance between spending wisely and growing your business?
What the Experts Suggest Doing Instead
Advertising in a stale economic climate is different from advertising during a period of economic expansion. You’re reaching out to customers who have become especially careful with their finances, which means you might have to try new techniques:
• Change which values you promote. The 2008 recession saw car manufacturers like Nissan focusing less on ideas like road trips and more on ideas like mileage per gallon to appeal to consumers’ frugality. Focusing on prices and temporary discounts can be risky, of course, because consumers tend to get accustomed to price cuts. Some experts instead suggest promoting a sense of community in your advertising and using a “We’ll get through this together” approach.
• Change your taglines. The appliance manufacturer LG was known for its slogan “Life’s Good” for some time. During the late 2000s, this rang a bit hollow to consumers dealing with unemployment and underemployment. Awareness of your customers’ experiences can go a long way, and your slogan can channel that. That’s why Wal-Mart chose to promote itself during with the tagline “Save money. Live better.”
• Change the way you advertise. Take a look at your advertising expenses, and figure out which ones provide the best value for what you spend. Mass media advertising might not be the format generating the most leads; meanwhile, the affordability and personal touch that direct mail provides might allow for just the immediate sales boost and long-term brand exposure you need.
When you’re looking at your company’s expenses during tough economic times, your advertising and marketing budget might seem like one of the easiest expenses to cut. Just remember that consumers still notice advertisements during an economic recession; the companies that advertise the most will reap the greatest rewards when the economy finally turns around.
Are you a business owner who reduced advertising expenses during tough economic times? What was your result? Let us know in the comments below!