Implemedia Blog

Widening the Gap by Changing the Rules

During economic hard times, when profits are slipping and stock prices are dropping, drastic measures are often required to preserve the bottom line. A prime target is communications, particularly advertising -the conventional wisdom being that this area of spending is a "discretionary" expense that is not critical if customers slow down their purchasing. While the perception is that communications programs may be sacrificed with little repercussion and quickly ramped up again when the economy recovers, the reality is that a reduction or suspension in business communications can do long-term damage to a company's position in the market.

According to numerous studies dating back to the 1920s, cutting back on communications during a downturn can cost much more than the "savings" from reduced budgets. Extensive evidence points to the conclusion that companies that maintain or increase their communications programs during a downturn not only recover far more quickly, but do so at the expense of their competitors.

Bold Movers versus Timid Competitors

Individual studies conducted following eight separate recessions beginning in 1923 were unanimous in their findings: Companies that reduce communications budgets in a downturn lose sales and market share and take longer to recover. Those that do not deviate from their long-term plans gain market share from their competitors and recover much more quickly.

One such study was conducted by Buchen Advertising. The study tracked a broad measure of industrial and business-to-business advertisers as they conducted business during and following successive recessions. The study examined advertising budgets and compared these to sales trends and profits before, during, and after four recessions. The conclusions revealed that when advertising budgets were cut during the downturn, sales and profits dropped off. After each economic recovery, these companies continued to trail competitors that had maintained their programs.

Subsequent studies by Buchen again revealed that cutting advertising during economic recession has negative results in both short- and long-term sales and profits. Conversely, the studies presented strong evidence that continuing or increasing advertising expenditures result in much greater sales and profits when compared to companies that cut back.

According to a study conducted by Patrick Barwise, Professor of Management and Marketing at London Business School, following the recession in the early 1990s, the most successful companies ignored short-term economic conditions and stuck to their strategy. They maximized long-term shareholder value by maintaining or increasing their advertising when the economy slowed down, while more shortsighted competitors cut back. Companies that maintain their advertising are able to build market share at lower cost than when the market is growing due to lowered media costs. Barwise concludes that any reductions in a firm's short-term financial performance due to maintaining advertising costs in tough times are more than outweighed by increased revenue and profit growth when economic conditions improve.

Barwise advises that during a recession companies should, "Look for new creative, media, or targeting opportunities, strengthen your market position against weaker rivals. Keep going, i.e. hold firm to your long-term strategy."

Communications as a Weapon

Rather than cut back on communications, turn an economic downturn into an opportunity to build your brand and aggressively pursue new customers. According to Professor Edward Lawler of the University of Southern California, communications can be one of your most potent weapons. In its struggle during an economic recession, the costs of marketing and advertising fall with lowered demand. By maintaining spending and negotiating wisely, you can get more firepower per-dollar and gain advantage over competitors that cut budgets. This will help increase market share faster and more economically than when the market is growing.

By aggressively communicating during a recession, you not only gain a larger share of the shrinking market, but you also place yourself in a favorable position when the economy turns around. A joint study conducted by Ogilvy and the Strategic Planning Institute found a clear link between increased spending on projected sales), captured 32% to 40% of the market...companies that spent about the same as their rivals gained a 23% market share, and those spending 'much less' had to be content with less than 15% of market. Market share, in turn, has a dramatic effect on profitability. Those companies with greater than 40% enjoy an average return on investment of 41%, while those with shares under 10% return profits around 9%.

No Guts, No Glory

Communications maintains your market share and attracts new customers. When sales drop off and budgets must be cut, a wise manager will think of the long-term effects of their actions. Cutting PR, marketing, and advertising may result in small benefits in the short-term, but will result in negative impacts on sales and profits in the long-term. Recession is not the time to hide. In fact, hard times are the time to get aggressive. Attack your competitor's strengths. Defend your market share and go after your weaker competitor's impulse to reduce spending. With these actions, you will save your market share, recover more quickly when the economy recovers, and boost future sales and profits.