Friday, August 28, 2009

Penny Wise, Pound Foolish? Marketing in a Recession

It's conventional wisdom that Americans are moving to a more frugal, debt free society. It's called the "great de-leveraging". Both companies and individuals are fixing their balance sheets by cutting expenses and lowering debt levels. Everyone seems to be caught up in this movement, except, of course, for our dear friends in the federal government.

But I would caution those that would cut too far. History is replete with examples of companies that lost their competitive advantage during downturns by starving their product development and marketing budgets. Here is a great list of examples from Derek Naylor, of Mobile Self Storage Magazine,

  • In April 1927, the Harvard Business Review found companies that advertised most during recessions had the biggest sales increases.

  • Companies that had higher sales and net income during the recession of 1974 to 1975 didn’t touch ad budgets. What’s more, they also beat non-advertisers in the two years following the recession’s end.

  • According to McGraw-Hill, companies that increased ad budgets during the 1981 recession trounced competitors not just during the downturn, but also for the subsequent three years.

  • Kellogg’s® pushed their ads through the Great Depression; Post® didn’t. Guess who dominated the cereal market for the next 50 years. Can you say corn flakes?

  • Stanley® Tools launched its biggest ad campaign during the 1974 recession. Their consumer product division took off. They grew at twice the rate of competitors every year thereafter.

  • Chevy® drove car sales in 1975. Ford® scaled back by 14 percent, afraid of higher gasoline prices. Chevy picked up two percent of the auto market. It took Ford five years to regain the lost ground.

  • In the recessions of 1949, 1954, 1958, and 1961, companies tracked for ad spending cutbacks saw sales and profits fall off. Those who kept ad budgets saw profits increase and kept an edge in the years that followed.

  • Consumer spending has increased during every post-WWII recession, according to The American Association of Advertising Agencies. (OK, maybe this one won't hold water anymore...)

  • When Coca-Cola® increased their worldwide marketing budget to $350 million in 2001, net income went up 22 percent.

  • IBM® increased its ad budgets 17 percent last spring; sales are up 8.9 percent.

  • In 1947, Buchen Advertising tracked the annual advertising expenditures for a large number of companies, correlating spending to sales trends before, during, or after the recessions of 1949 and 1954, as well as sales and profits trends surrounding the recessions of 1958 and 1961. It found that sales and profits dropped off almost without exception at companies that cut back on advertising, and these lags continued even after the recession ended.

  • For the 1970 and 1974 to 1975 recessions, The American Business Press and Meldrum & Fewsmith showed that advertising aggressively during recessions not only increases sales but increases profits. Speaking of the 1970 recession, the study concluded, “Sales and profits can be maintained and increased in recession years and in the years immediately following by those who are willing to maintain an aggressive marketing posture, while others adopt the philosophy of cutting back on promotional efforts when sales appear to be harder to get.”

    Regarding the 1974 to 1975 recession, the study stated, “Companies that did not cut advertising expenditures during the recession 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.”

  • McGraw-Hill Research analyzed 468 industrial companies during the 1974 recession and 600 industrial companies in 16 different industries for the 1981 to 1982 recession. Findings showed that firms which increased or maintained their advertising spending averaged significantly higher sales growth, both during the recession and for the following three to five years than those who eliminated or decreased advertising. As the graph shows, sales of companies which maintained or increased advertising during the 1974 recession showed 132 percent sales growth by 1978, while those who cut advertising were ahead by 79 percent. During the 1981 recession, sales of companies that were strong recession advertisers had risen 275 percent, compared to an increase of 19 percent growth for those companies which decreased spending.

  • In 1982, Cahners Publishing Company & The Strategic Planning Institute studied 2,000 businesses to explore the relationship between market share and profitability, and advertising’s impact on this relationship. As it pertains to our discussion of recessions, the study found that businesses which increased media spending by up to 28 percent had a 0.5 market share increase during periods of recession, and those that increased 28 to 80 percent increased market share by 1.5 share points. During expansion times, however, those that increased media spending up to 28 percent saw a 0.2 share increase, and those increasing 28 to 80 percent also had a 0.2 share increase.

    In other words, the study suggested that recessionary market conditions can provide an opportunity for a business to break from traditional budget cutting patterns and build a greater share of market through aggressive media advertising.

So what can happen if you cut the budget? Here is a list from the people at the Opposable Thumbs blog:
1. Your reputation can suffer
2. When times are tough people look for deals
3. If you are not moving forward, you are moving backward
4. Marketing in a recession can give you a competitive advantage
5. Cut advertising, cut market share
Now, there is a silver lining here. The phenomenal change in marketing in the last 3-4 years has been the rapid raise of social networks and the integration of social media into overall B2B marketing strategies. Low cost, easy to track, quick to pay for themselves- my firm has been developing executing social media pilot programs in a variety of industries in the middle of this great recession with positive ROI, expanded budgets and ecstatic marketing managers.

What does this mean? It means that you can invest in marketing w/o having to go to the CFO with a budget request that you know has no chance of getting approved.

What do you think? Are you integrating social media into your marketing programs?
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