5 Reasons to Pause Before Cutting Marketing Spend in a Downturn
It is common practice for marketers and business leaders to slash marketing spend during a recession. With customer spending and revenue likely to dip, organizations rush to cut expenses to preserve margins. Marketing is often the first budget to tighten, something many organizations will consider if a recession strikes in the coming months.
But organizations should pause before cutting marketing spend. It is unclear that reducing spend improves profits, as disappearing from the market while competitors continue to communicate with customers can undermine sales, putting a dent in the revenue that offsets expenses.
So, marketers should consider the pros and cons and question whether maintaining spend might be the wiser path.
Reducing marketing spend is likely to reduce incremental sales, undermine ROI, introduce competitive risk, undercut the ability to protect price premiums, and decrease customer acquisition and engagement. All these effects can hurt the business in the short and long term.
Let's consider why marketers should maintain spend to safeguard all five of these key business outcomes.
Preserve Incremental Sales
Effective advertising allows organizations to reach new customers, driving incremental sales. When marketers pull back on paid advertising during a recession, they constrain themselves to existing customers and hamstring themselves when it comes to reaching new ones. Plus, they expose existing customers to the messaging of bolder competitors who have not paused advertising.
To gauge the impact of cutting ad spend and undercutting incremental growth, review your marketing and sales data. What do your baseline sales look like over the last 12 to 24 months, and what are they projected to be in the next 12 to 24 months? What happens if you give up incremental sales?
A clear picture of marketing performance can help you determine how much revenue you're risking by slashing ad spend and whether cutting paid advertising will really deliver an increase in profits during a downturn.
Boost Marketing ROI
Advertisers may assume that consumers will spend less during a recession and conclude that marketing ROI is likely to dip. Let's cut spend, these marketers might say, and avoid overwhelming our customers when they are unlikely to buy.
But this line of thinking misstates the value proposition of advertising during a recession. Consumers continue to spend during a recession, albeit at slightly reduced levels, but marketers tend to cut spend drastically. This lowers competition for consumer attention and boosts the ROI for marketers who do maintain spend. Sixty percent of advertisers have achieved higher ROI by spending more during past recessions.
Maintain a Competitive Edge
For the same reason that recession marketing can drive higher ROI — competitors are taking themselves out of the market — boosting advertising during a recession offers a prime opportunity to gain a competitive advantage. Your customers are still going to consume a great deal of media during a downturn. If you're there when your competitors aren't, who's going to see a boost in market share?
Research bears out this conclusion. When examining 390 companies grouped into three categories — those that cut ad spend during a recession, those that increased it by less than 20 percent, and by more than 20 percent — Alex Biel and Stephen King found that aggressive advertisers increased their market share by 0.5 percent. They also found that increases in market share were most intense during the recession but persisted afterward. In other words, the opportunity to gain an edge is during a recession at the precise time when rivals are fleeing the market.
Protect Price Premiums
Marketers often make one of two mistakes during a recession when it comes to pricing: they slash prices in hopes of winning price-conscious customers, or they boost them to try to make up margins amid lower volume. Often, organizations do both, oscillating from one to the other. Research shows this produces the worst possible results.
Instead, stay firm on your prices. Let customers know what to expect from you and communicate with them via advertising to protect price premiums. The brands that will be least able to defend their prices will be those that stop speaking to their customers. Staying top of mind and showing customers you care while being consistent on pricing is the most sure-footed approach for most brands.
Nurture Customer Engagement over the Long Term
Perhaps most crucially, what all the aforementioned data suggests is that slashing ad spend not only fails to preserve recessionary-period margins but drives long-term losses in market share that can haunt brands years after the market recovers. If you disappear from consumers' consciousness for 12 to 18 months, they may adopt one of your competitors. Why would they go back to you when the recovery sets in?
The temptation to cut paid advertising during a recession is understandable when scrutiny intensifies and a CFO, board, or shareholders are standing over your shoulder. But by doing your research and bringing numbers to the table, you can make the data-driven case for maintaining a conversation with your customers to drive acquisition, engagement, and retention, even during a recession.
In the long run, maintaining spend will produce the results that satisfy the stakeholders who need convincing.
The views and opinions expressed are solely those of the contributor and do not necessarily reflect the official position of the ANA or imply endorsement from the ANA.
Konstantinos Spetsaris is the SVP at Analytic Partners.