Marketing During An Economic Downturn

October 23, 2008

Companies often respond to the onset of a poor economy by cutting operating costs. And much of the time, marketing and advertising budgets are the prime targets.

Companies often respond to the onset of a poor economy by cutting operating costs. And much of the time, marketing and advertising budgets are the prime targets.

A great deal of evidence suggests that it’s not a good idea to reduce marketing dollars during a recession in order to hit financial targets. Doing so may leave your brand in a less competitive position when the economy recovers. And over the years, research studies have confirmed that the best strategy in terms of long-term return on investment (ROI) is to increase marketing expenditures during an economic slowdown.

An analysis of the Profit Impact of Marketing Strategies (PIMS) database, presented at a March 2008 Independent Practitioners Alliance (IPA; New York City) conference, provides the latest evidence. This analysis compared the results achieved by companies that increased, maintained, and reduced marketing spend during a 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.

Past Recession Periods
In 2002, McKinsey & Co. (New York City) published a study based on data collected from approximately 1000 firms between 1982 and 1999 and included the recession period of 1990-1991. The study identified some key differences between the strategies of the best and worst performers, with the measure of performance being changes in the company’s market-to-book ratios. Interestingly, one of the most significant differences between winners and losers was with respect to their spending on marketing and advertising during the recession period. Far from tightening their belt when the economy went south, the best performers increased their spending in these areas, not just relative to their competitors, but also compared to their own spending in better times.

For well-positioned companies, an economic recession should not prompt marketing cutbacks, but rather an aggressive increase in marketing spend to achieve superior business performance, according to research authored by Gary Lilien and Arvind Rangaswamy of Penn State's (University Park, PA) Smeal College of Business. Companies that have done this quite successfully in the past include Procter & Gamble (Cincinnati) pushing Ivory soap during the Great Depression, Intel (Santa Clara, CA) launching "Intel Inside" during the 1990-1991 recession, or Wal-Mart (Bentonville, AR) smothering the competitors with Every Day Low Prices during the 2000-2001 post-bubble slowdown.

Just three years ago, a survey of more than 150 senior marketing executives published in the International Journal of Research in Marketing mirrored findings of the McKinsey & Co. report. The authors developed and tested a model examining the outcomes for companies who pursued active marketing strategies during times of recession. It found that those companies that increased marketing and advertising in the contraction phases of the business cycle performed better than those that stuck to the traditional line of cuts that often take place during a recession.

The Nutraceutical Industry
Looking forward, what companies are primed to have an advantage when a recession hits? In spite of all the evidence suggesting that recessions are a good time to market more aggressively, management teams need to judge each case on its individual merits. The best strategy for your brand-whether it is offense or defense-will depend on a number of things: the nature of your category, your category's size, the inclinations of your customers, your brand’s strength relative to others, and, most important, the actions and reactions you expect from your competitors.

It's rare to find a company that has historically valued marketing, features a corporate culture that rewards risk taking, and has more than a little spare change lying around. The firms that have all three characteristics will do very well in a recession. These statistics provide a strong endorsement for ongoing marketing campaigns to sustain product brands in lean times.

Discussion among publishing leaders in the nutraceutical marketplace revealed that for some time it's been difficult to sway advertisers to maintain a viable ad program. Most advertising representatives say they are doing well with renewals. One publication noted that while advertisers have not increased placement, some companies have expanded presence from a one-third page to a full-page ad. Overall, publications noted that ad sales were up approximately 10–45% over 2007.

A new study including more than 675 B-to-B marketers was conducted by BtoB magazine in January 2008. Despite concerns about a recession, over 70% of marketers indicated they would either hold or increase their marketing budgets in 2008.

Of those surveyed, nearly half increased spending for online marketing. Direct and event marketing followed by print advertising also showed increases.

According to Len Monheit, global supply products portfolio director at New Hope Natural Media (Boulder, CO), supplement industry print advertising seems to be up in many parts of the market, while e-media marketing is consistently moving at a higher pace.

"Industry surveys indicate overall fourth quarter advertising may stall a bit, but e-media should be fine. For the most part, it appears right now that the industry has weathered the storm," says Monheit.

Reality Check
That means now is the time to take advantage of this space vacuum. If clued-up companies aggressively market more, there is greater potential to pull in business.

In his book Ogilvy on Advertising, David Ogilvy discussed marketing in a recession.

"What should you do in a time of recession, when you need every penny to sustain your earnings? Stop advertising?"

Citing research, Ogilvy noted that companies that retained their ongoing advertising budgets had more than doubled their sales two years later, while sales from companies that cut their advertising budget had barely gone up 50%. Three years later, sales were down for companies that had cut their advertising while it was up for those that did not. The net income for those companies also followed the same suit over the same period of years-those companies that did not cut back their advertising had more than tripled in sales, while companies that did cut back during the recessions had barely doubled.

Marketing During a Recession
During recessionary times you have to be smarter. You have to market smarter and reach a larger target audience with your brand marketing message.

The arrival of a recession means it is time for corporate executives and marketing managers to change tactics and focus on why brand equity is your best defense in a recession. Talk about the power of strong brands in the face of declining customer spending. Explore the topic of brand loyalty, not in terms of growing share of wallet, but retaining it in the face of lower-priced value alternatives. Most importantly, remember that the brands that continue to build their equity in the recession will be best placed to enjoy the fruits of their labor when the economy inevitably returns to growth.

In difficult economic times, a brand must reinforce the attributes that make it appealing and differentiated in the eyes of existing customers. Different strategies suggest themselves, depending on the existing status of the brand.

Advertising in a down economy clearly creates a competitive advantage. The vast majority of executives agree that when they see a company advertising in a down economy, it makes them feel more positive about the company's commitment to its products and services. More importantly, it also keeps those companies at the top of their mind when purchase decisions are made.

The greater the active marketing of a company during a recession, the better is its marketing and business performance. Advertising aggressively in a recession can not only boost sales and market share, it can also open a lead on the more timid competition. It can skillfully reposition a product to take advantage of new purchasing concerns, give the image of corporate stability within a chaotic business environment, give a company the opportunity to dominate the advertising media, and probably most importantly, increase revenues in the long term.

Sheldon Baker is senior vice president and partner of the Baker Dillon Group, a Northern California-based brand marketing firm. For more information about the Baker Dillon Group, visit www.BakerDillon.com, send an e-mail to info@bakerdillon.com, or call 800/570-1262. Baker is also a director of the Consultants Association for the Natural Products Industry (CANI; Clovis, CA). For more information about CANI, visit www.Cani-Consultants.org.