It’s been proven that an increase in marketing spend during a recession can gain a long-term advantage for a brand.
Everyone is talking about recession. The talk alone may be enough to trigger one, whether the underlying economics dictate it or not. From observations of recessions past, we know that consumers are quick to rein in spending when hard times are predicted.
Many business leaders behave the same way. Anticipating reduced sales, they are inclined to cut back on variable costs, including marketing, in order to deliver on the expectations of the financial market.
However, a great deal of evidence suggests that it’s not a good idea to reduce marketing spend during recession in order to hit financial targets. Doing so may leave your brand in a less competitive position when the economy recovers. Over the years, research studies have confirmed that the best strategy in terms of long-term ROI is to increase marketing expenditure during an economic slowdown. An analysis of the Profit Impact of Marketing Strategies (PIMS) database, presented at a March 2008 IPA conference, provides the latest evidence. This analysis compared the results achieved by companies that increased, maintained, and reduced marketing spend during recession. Metrics used were Return on Capital Employed (ROCA) during the recession, ROCA during the first two years of recovery, and market share change during the same period of recovery. While companies that cut marketing spend enjoyed superior ROCA during the recession, they achieved inferior results after the recession ended. During the recovery, the “spenders” achieved significantly higher return on capital employed and gained an additional 1.3 percentage points of market share.
These findings, which may seem counterintuitive, can be explained by three basic factors.
1. The relationship between share of market and share of voice The connection between share of market (SOM) and share of voice (SOV) has been proven. The higher your share of voice compared to your actual market share, the more likely your brand is to grow its market share in the subsequent year. So, if you increase your marketing investment at a time when competitors are reducing theirs, you should substantially increase the saliency of your brand. This could help you establish an advantage that could be maintained for many years.
2. The relationship between brand size and profit margins
Because they enjoy advantages of scale, big brands enjoy an advantage over smaller ones in terms of attracting repeat purchase and recouping their marketing investments. Therefore, a brand that increases share during a recession stands to benefit from this multiplier once the economy rebounds.
3. Reduced “noise” during recession provides opportunities
A new product launch may actually have greater impact during a recession than at other times, for several reasons. A product that is unique or demonstrably better than others should be able to command a higher price, even among priceconscious shoppers. Competitors who are running scared may be late in countering a new product with their “me-too” offerings. And, because media costs are likely to be lower, advertisers should get more bang for their buck. These savings may be compounded by the relative ease of cutting through in a less cluttered atmosphere.
Overall, competing in a recession is like running a marathon. A smart frontrunner will seize the lead and work to increase it while others are flagging. If the other runners allow the gap to widen, it will be really tough for them to regain the lost ground when the pace picks up again.
Experienced brand marketers with deep pockets know this. Procter & Gamble CEO A.G. Lafley, quoted in The Wall Street Journal states, “We have a philosophy and a strategy. When times are tough, you build share."
Everyone is talking about recession. The talk alone may be enough to trigger one, whether the underlying economics dictate it or not. From observations of recessions past, we know that consumers are quick to rein in spending when hard times are predicted.
Many business leaders behave the same way. Anticipating reduced sales, they are inclined to cut back on variable costs, including marketing, in order to deliver on the expectations of the financial market.
However, a great deal of evidence suggests that it’s not a good idea to reduce marketing spend during recession in order to hit financial targets. Doing so may leave your brand in a less competitive position when the economy recovers. Over the years, research studies have confirmed that the best strategy in terms of long-term ROI is to increase marketing expenditure during an economic slowdown. An analysis of the Profit Impact of Marketing Strategies (PIMS) database, presented at a March 2008 IPA conference, provides the latest evidence. This analysis compared the results achieved by companies that increased, maintained, and reduced marketing spend during recession. Metrics used were Return on Capital Employed (ROCA) during the recession, ROCA during the first two years of recovery, and market share change during the same period of recovery. While companies that cut marketing spend enjoyed superior ROCA during the recession, they achieved inferior results after the recession ended. During the recovery, the “spenders” achieved significantly higher return on capital employed and gained an additional 1.3 percentage points of market share.
These findings, which may seem counterintuitive, can be explained by three basic factors.
1. The relationship between share of market and share of voice The connection between share of market (SOM) and share of voice (SOV) has been proven. The higher your share of voice compared to your actual market share, the more likely your brand is to grow its market share in the subsequent year. So, if you increase your marketing investment at a time when competitors are reducing theirs, you should substantially increase the saliency of your brand. This could help you establish an advantage that could be maintained for many years.
2. The relationship between brand size and profit margins
Because they enjoy advantages of scale, big brands enjoy an advantage over smaller ones in terms of attracting repeat purchase and recouping their marketing investments. Therefore, a brand that increases share during a recession stands to benefit from this multiplier once the economy rebounds.
3. Reduced “noise” during recession provides opportunities
A new product launch may actually have greater impact during a recession than at other times, for several reasons. A product that is unique or demonstrably better than others should be able to command a higher price, even among priceconscious shoppers. Competitors who are running scared may be late in countering a new product with their “me-too” offerings. And, because media costs are likely to be lower, advertisers should get more bang for their buck. These savings may be compounded by the relative ease of cutting through in a less cluttered atmosphere.
Overall, competing in a recession is like running a marathon. A smart frontrunner will seize the lead and work to increase it while others are flagging. If the other runners allow the gap to widen, it will be really tough for them to regain the lost ground when the pace picks up again.
Experienced brand marketers with deep pockets know this. Procter & Gamble CEO A.G. Lafley, quoted in The Wall Street Journal states, “We have a philosophy and a strategy. When times are tough, you build share."
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