Defending the budget in difficult times

Defending the budget
Market Leader January 2012

Marketers need to defend against potential cuts in marketing budgets and must better explain the case for marketing expenditure in austere times.

Most studies confirm that advertising and promotional expenditures in recessions produce ROI, contributing most to earnings in the year of expenditure, but also beyond – up to three years for consumer goods and two years for industrial products. (Interestingly, this effect does not happen with services.)

When we do get an increased ROI for B2C or B2B, there are several reasons:

  • firms can achieve a greater share of ‘voice’ as most companies cut back marketing spend during a recession;
  • advertising increases both the salience of the product to consumers and the perceived brand quality;
  • counter-cyclical promotion boosts consumer confidence, helps overcome inertia and sends reassuring signals to concerned consumers;
  • it reinforces the reasons for brand choices in uncertain economic times and helps justify premium prices;
  • it attracts the increased numbers of ‘brand switchers’ who are less loyal and more opportunistic in a recession, if more promotional spend is put into call-to-action and point-of-sale-oriented activities; and finally
  • market share is easier to get as competitors are too hard pressed to defend their position vigorously.

Firms that manage to increase marketing spend and do proactive marketing during a recession, leading to increased business performance, share a number of characteristics.

They have a strategic emphasis on marketing, an entrepreneurial culture, slack resources (ie resources that are in excess of the minimum necessary to produce a given level of output, such as underutilised human resources, unused production capacity, excess cash resources), and strategic flexibility, which is the ability to rapidly redeploy resources to adapt to changing circumstances.

"Market share is easier to get as competitors are too hard pressed to defend their position vigorously"

There are some brandspecific factors that could help marketers persuade their CFO to release more money. For example, if the brand enjoys money-saving points of superiority, or if it has a balance-sheet advantage over rivals and thus competition is unable to respond to aggressive marketing increases, or if the brand can demonstrate the value of quality and has a large market share.

CFOs unfortunately have their own arguments for reducing marketing spend. Here are the key objections and arguments to refute them.

  • ‘Consumers have less disposable income and will not be spending anyway.’ To rebut this, research shows that for a 1% change in GDP there is a 1.4% change in advertising expenditure, so often the marketing spend is cut disproportionally.
  • ‘We need to appease shareholders through continued dividends disbursements.’ Again, the evidence shows that investor confidence declines for firms that discontinue corporate advertising campaigns and that annual growth in shareholder value for companies that do not tie their ad spends to the business cycle is 1.3% higher.
  • ‘Resources could be better allocated to product development or R&D.’ The rebuttal to this is that increases in R&D have been shown to lower profits for B2B and B2C firms, but have had no effect on service firms, while increased advertising improved profits for B2B and B2C, but not for service firms.
  • ‘If everyone is cutting back, we won’t be hurt.’ This is only if the assumption is true and even so, firms could capitalise on the opportunity to seize market share as competitors cut back.

"If you lose the argument and have to cut your budget, take a scalpel rather than a meat cleaver"

Use a scalpel

Two arguments are difficult to refute, namely: ‘media costs reduce in a recession’; and ‘we just don’t have the money’.

However, if you lose the argument and have to cut your budget, take a scalpel rather than a meat cleaver by: shifting from 30- to 15-second ads and using cheaper radio rather than TV, especially for reminder advertising; advertising jointly with a brand in a different product category but same target segment; adapting or extending existing campaigns rather than commissioning new ones; and trying to consolidate advertising at a single agency to maximise media buying discounts.

Whatever the outcome of the budget battle, steps can be taken to improve the efficiency of a given budget in difficult times. For example, most consumers become more price sensitive during a recession, but this can vary by a factor of 13 by market and market segment. So, check before you start engaging in more and deeper price promotion. Also, think about using websites such as Voucher Cloud which can be highly targeted, flexible and time limited.

The product strategy challenge is to innovate at the right price. Breakthrough innovations can build firm value significantly, while small innovations preserve firm value. For example, Purex detergent brand is succeeding in getting core customers to spend more on their laundry even in thrifty times by adding an anti-static fabric sheet.

Finally, have the courage to be bolder and more creative. For example, Universal’s use of the most influential bloggers to promote their new Harry Potter ride, or caring for homeless people on the iHobo app, or Smirnoff Vodka Experience replacing conventional campaigns with a combination of brand events and parties and social networking sites to build a ‘movement’ around the brand.

Full references of all the studies are available from the author on request.

Vincent-Wayne Mitchell is Professor of Consumer Marketing, Cass Business School, London.

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Featured Image: Learn to fight your corner during austere trading conditions