Recession Spending

Ad cutbacks don’t always make sense

Economists seem to be almost as certain as you or I about whether we are going to stay in a recession or things will improve this year. Some see doom while others see steady growth.

If management believes that a recession will occur, many will slash their company’s advertising and promotional budgets—again—as part of what they feel are a series of prudent moves. Their reasoning is that a recession could lead to lower sales and lower net income. They believe that cutbacks in discretionary expenses such as promotion can be made easily, and there won’t be any impact.

But, before making the move they have to ask themselves:

  • What does advertising do for us, and can we achieve those same objectives with a smaller budget?
  • Is there any cause and effect information available regarding companies that have cut their advertising budgets during recessionary periods as opposed to those who have maintained or increased their budgets?
  • Can a recession be used to gain advantage over the competition?

Smaller Budget

All too often, management not only looks at advertising as an expense, but also as something that is carried out with the sole purpose of immediate sales.

This is partially true; however, advertising should be viewed as an investment rather than an expense. An investment not only for short-term sales gains, but also for achieving long-range goals and developing stronger name and brand franchise. Strong and consistent advertising reinforces favorable attitudes toward your company and its products, not only among customers, but also among investors and the other publics you must influence.

In today’s industry, advertising is being used to assist in reducing the overall cost of doing business. The average cost of a business-to-business sales calls has risen to more than $500 (double the cost of five years ago), and on average, each sale requires at least five sales calls. If advertising can substitute for one or more of the personal sales calls, the effect can be accomplished for pennies.

With the industry’s growing understanding and use of marketing concepts, advertising is being viewed as an integral part of the marketing mix rather than as an expense.

This would seem to indicate then that it is in the company’s best interest to develop and maintain an aggressive advertising policy, assuming they can expect a favorable effect on the company’s sales and income.

Cause and Effect

Today, a large body of data exists that clearly shows there is a direct cause and effect of increasing or decreasing advertising during recessionary periods.

In summary, they show:

  • Advertising builds strength. Companies that invest more in adver- tising over a period of years experience faster growth than those that spend less.
  • Advertising speeds recovery. Companies that have increased their advertising during a recession have recovered more rapidly than their counterparts that have maintained or reduced advertising.
  • Advertising affects sales. Organizations that have continuously increased their advertising investment have enjoyed similar increases in sales.

For example, Meldrum & Fewsmith Advertising and the BPA, studied 64 business-to-business companies that advertised during a recent recession. Thirteen companies cut advertising an average of 20–50% during the two years of recession, while the remaining increased their advertising investment 30–70% during the period.

The companies that increased their advertising stance not only continued to grow, but grew at a more rapid rate when the country’s financial picture improved. This growth was achieved in both sales and net income.

The results have been similar in every advertising investment study conducted since the 1920s. The first study, conducted by Roland S. Vaile, covered advertising and sales of 200 companies between 1920–1924. He concluded that a definite spread occurs between sales of companies that increase their advertising and those that decrease it. He added that, when intensive advertising during the depression was part of the sales technique, sales were maintained in better volume than when advertising appropriations were cut.

Recessions and Competitive Edge

For more than 80 years, advertising agencies and publications have been telling client management that a recession provides a unique window of opportunity for those firms that are market-driven.

Marion Harper, former president of McCann-Erickson once said, “A time of recession is the most favorable time for a change in competitive positions. Companies that are second in their fields, by applying extra pressure and devising creative strategies, can gain advantages that they can carry into times of prosperity. Whatever their position, if companies wish to be growth companies, they must certainly behave like growth companies.”

Charles Brower, former president of BBDO, stated, “Instead of waiting for business to return to normal, you should be cashing in on the opportunity your overly cautious competitors are creating for you... The fact that your competitors are pulling back can make your advertising dollars look and act even bigger. There are few things as detrimental as a lapse in advertising. It costs much more to get advertising momentum up than it costs to keep it going. Once you let momentum die, you must start almost from scratch again.”

The producer who maintains his or her normal level of promotion when competitors have reduced theirs soon finds that they gain a similar increase in competitive share of market. It provides a rare opportunity for management to change market position. Then when business improves, they will grow at a much higher and more profitable rate.

One of management’s most important roles is to exploit competitive opportunities. While most management teams tend to hold off being aggressive until all of the marketing variables are favorable, this action puts you right back in the middle of the pack so that you are competing with all of your competitors.

Taking this approach, some of your advertising investment is an expenditure since you have to vie head-to-head and toe-to-toe with your competition rather than taking advantage of opportunities.

In today’s refinement of marketing warfare, the winner is the one who takes optimum advantage of every strategic and tactical marketing blunder by his or her competition. The smart marketers acknowledge that economic cycles are elements in the marketing battlefield that have to be used to advantage if the firm is to improve its position and increase marketshare.

G.A. “Andy” Marken is president of Marken Communications, Inc., Santa Clara, Calif. He can be reached by e-mail at andy@markencom.com.

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