Out of the Box

To Increase or Decrease Marketing Expenses in a Recession

By Menachem Lubinsky on February 08 2008

Larry is beginning to feel the pinch. He sees customers who think twice before they order the custom furniture he sells. His partner has already suggested cutting back their $150,000 a year advertising budget by as much as a third as well as trimming other costs. This business environment of a looming recession could not have come at a worse time. The company had spent a considerable sum of money to upgrade their marketing program but with sharply reduced orders, Larry felt he had no choice but to accede to his partner’s wishes and trim the ad budget.

If this seems to be the proper course to take during a downturn in business, most marketing experts and many of the larger companies disagree. Larry’s company is built on advertising and word-of-mouth. He lives from the constant feed of his advertising program. According to a prominent advertising publication, Procter & Gamble Co., Colgate-Palmolive Co., Kraft Foods and Kellogg Co. “all have boosted or at least maintained their marketing budgets, even as they’ve had to implement cost controls elsewhere.” These are companies that rely heavily on advertising to maintain market share. They are also aware of the fact that their competitors will take advantage of any lull to move the needle in their favor.

In the food industry, this near-recession also comes at a time when many commodities are going through the roof, sharply increasing prices. Dairy and wheat prices continue to soar, for example. Increased prices were also an issue for Larry, but the cost of raw materials has been going up for years, and it did not have an appreciable effect on business. Advertising drove his business even when his prices went up.

In reviewing various “papers” by marketing experts, there seems to be a difference of opinion on when or even if to reduce ad spending in a recession. Some who always advocate increasing ad spending proportionate to revenues believe that the reductions should also be based on declining revenues. Others believe that reductions in revenues should be precisely the time that ad spending is increased.

Manufacturers often feel that they can pass along the increased costs of producing the goods. They feel that everyone understands that inflation necessitates increases. So trying to explain the increases through advertising is superfluous. Others argue that customers are not convinced that increases in the cost of production should spell automatic increases in prices. They believe that companies should look for other cost saving measures to deal with inflation. This explains why some companies faced with the increases feel that they have to explain the increases despite the recession, while others feel that the customer is unforgiving in any case and that advertising might not necessarily help them.

Some companies deal with price increases by advertising improvements to the product or suggested users. They in sense try to camouflage the increase by making the customer feel that they are still getting value. Marketers say that this approach works.

One paper I read analyzed the results of both increased and decreased ad expenditures during the recession in the ‘70’s. It seems that companies that continued or even increased advertising emerged stronger right after a recession. They benefited from the constant branding and “from never missing a beat.” On the other hand, those that retrenched found the recovery after a recession to be more difficult.

The large companies who are opting to increase advertising during this period measure all their sales against advertising. They somehow believe that a good chunk of their sales is due to advertising. They will tell you that even brand loyal customers are reinforced by advertising. It is for that reason that they have a hard time ever retrenching advertising.

Small companies may not have the deep pockets that the larger companies have. Like Larry’s partner, their formulas are pretty simple. When business slows, they cut back expenses and advertising is almost always amongst the first culprits. Larry says that it is almost automatic for him: Cut back the advertising and the phones slow down as well.

For some small companies, a downturn in business simply means having a lot less cash. Cutbacks in advertising are done out of necessity because cash is scarce. But if at all possible, the advertising budget should be the last category to be cut, especially when it is the lifeline for a business.

Out of the Box is a collection of strategic marketing articles that Lubicom has published on various topics, trends and ideas in the marketing world. The articles have been published in the Hamodia weekly newspaper circulated on three continents to a readership of well over 100,000.

The name, "Out of the Box" is a term used frequently in business nowadays to describe creative thinking that is not the norm. It is meant to help a business pull away from the pack or separate oneself from the competition. It is to some extent fraught with risk, simply because it is not the run of the mill thinking, but it is at the same time the key to reaching the next opportunity.