Recession, financial downturn, call it what you will… what is clear is that the immediate reaction of many brands in periods of financial hardship is to claw back or reduce marketing budgets. From a media and marketing perspective it is of course frustrating when it seems like cutting ad spend is the immediate solution finance departments find to balance the books or prepare for a potential economic downturn. But is it the best solution, and if not, what does history and experience tell us is?
THE DEBATE
There is no hiding from it times are tough right now, inflation in the UK hit 9.6%, inflation in the US has hit 7.7% (October to October 21 Vs. 22), there is a cost-of-living crisis in many markets, the war in Ukraine is impacting energy prices and we are still battling with the legacy of the Covid-19 pandemic. With this backdrop there is a pool of data points to suggest that markets are starting to adjust, with shifting behaviors and consumption habits aligning to the sharp price increases seen so far in 2022.
It is therefore entirely understandable that CFOs and finance teams are looking at options to balance brands immediate finances, however reducing marketing investment albeit often the quickest solution is also one of the most dangerous.
The common theory is that brands that cut their marketing budget during a recession leave themselves at a long-term disadvantage, we have seen the likes of Coca-Cola and Virgin Atlantic (amongst others) increase ad spend during periods of financial downturn to significant benefit. Further research by WARC proves this effectiveness with an incremental sales growth achieved by brands that increased investment during the 2008 recession of 17%, whilst 60% of marketers that raised their outlay during 2008 realised a better ROI (WARC 2022).
Byron Sharp teaches us that “brand building is the main thing that drives a brands revenue stream, its cash flow and its profits” increasing loyalty can reduce price sensitivity in difficult times helping brands increase or (more applicable perhaps in periods of recession) at least maintain margins. On top of this and what is more unique with the current financial situation is that due to sharp inflation, brands need to be maintaining investment as they seek to justify price increases, without this there is a significant risk of trading down and dangerous levels of price elasticity.
Plan for the recovery not just the recession.
CONCLUSION (A MESSAGE TO THE CFO)
Whilst understanding that every business has its own specific needs and immediate requirements, we must get across that marketing is an investment and much like a long-term investment in the stock market shouldn’t be pulled at the low point or times of recession, instead the opposite is true, it is an opportunity to secure the long-term future of a brand.
Before cutting marketing budgets in periods of downturn or recession think twice, very carefully. It can take up to five years to recover from reducing budget for just one year, or three years to recover from even halving it for one year. Brands could be contributing to their own negative spiral, it may work as in immediate solution in a solitary financial quarter or two, but decisions like this can trigger a continued decline for quarters and years to come.
This narrative can be hard to get across if the marketing budget is seen as a cost rather than an investment. It has never been more important to build close relationships with financial decision makers and to help them plan predicted cash flows and ROI on marketing spends. Models and plans that look at the cash flow and longer-term ROI of customer acquisition should be used to help build this message and to break out of the cycle of short-termism.
“Long tail impact of reducing or cutting advertising budget” – Growing in a recession & Brand Building, Carat, 2022
Jake Hodgson – Global Strategy Director, iProspect
