Opinion

When Money's tight, spend more

Author: Vincent-Wayne Mitchell


Companies should increase advertising in times of austerity, not cut back, argues Vincent-Wayne Mitchell, Professor of Consumer Marketing at Cass.

In times of austerity one of the first cuts a company makes is to the marketing budget. Logic suggests that reducing advertising makes sense because consumers have less disposable income and will not be spending. Contrary to this presumption, virtually all studies demonstrate that advertising spend is strongly related to business performance and this is true in all economic climates, from the prosperous to the austere. Annual growth in shareholder value for companies that do not tie ad spend to the business cycle is 1.3% higher than in companies that do.

So why is this?
Firms can achieve a greater share of the total advertising voice as other companies cut back on marketing spend. Advertising increases both the salience of the product to consumers and the perceived quality of the brand since the adverts remind them of the brand value. And counter-cyclical advertising in particular sends a reassuring signal of confidence to concerned consumers and entices customers to switch from weaker rivals. Since customers are less loyal and more opportunistic in austere times, increased marketing spend attracts trial purchasers, and is needed because the cost of retaining customers increases. In addition, the focus of marketing spend is on call-to-action and point of sale rather than on the long-term building of the brand. Finally, market share is most up for grabs in a recession when competitors are too hard pressed to defend their position vigorously.
At company level, four factors can indicate that investment in marketing during a recession will be profitable:
• The company already has a strong emphasis on marketing
• There is an entrepreneurial and innovative culture within the company
• The company has slack resources (a pool of resources in excess of the minimum necessary to produce a given level of output)
• The company has the strategic flexibility to rapidly adapt resources to changing circumstances.

At brand level, there should be more marketing money invested when:
• The brand can be positioned as a value brand, such as Asda-Walmart
• The company can launch a value sub-brand, for example Fairfield Inns by Marriott - a franchised chain of lower-cost hotels for customers who simply want a bed for the night with fewer other amenities
• The brand can seemingly demonstrate an economic advantage to paying more for perceived quality. For example, Fairy Liquid claims to pay by doing more with less. The premium value of the brand can remain unchanged but it can appeal to the austerity customer.

Entrepreneurial marketing
Companies looking to innovate in times of recession could look towards their marketing activity as an area to be developed, not reduced. While arguments such as "we just don't have the money" and "media costs reduce in a recession" will always have resonance in a downturn, truly entrepreneurial marketers should be able to justify budgets in any environment. The argument "if everyone is cutting back we won't be hurt" is valid only if the assumption is true. Firms capitalising on the opportunity to increase their market share as competitors cut back will inevitably maintain a higher market share when the economy picks up again. Studies suggest that there is strong evidence that cutting back on advertising can hurt sales both during and after a recession. Perhaps, when times are tough, the best method of defence is attack.

For more commentary and analysis by Cass experts, go to www.cass.city.ac.uk/casstalks