Don’t Cut Your Marketing Budget in a Recession

Executive Summary

Companies tend to cut marketing in a recession.  But firms that maintain their marketing spend while reallocating it to suit the context – be it in product developing, advertising and communication, or pricing – typically fare better than firms that cut their marketing investment.

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Most companies reduce spending in recessions, especially on marketing items that may be easier to cut (certainly relative to payroll). Right now, advertising agencies are struggling to stay afloat, and Google and Facebook are reporting substantially lower ad revenues as marketing spending dives with the business cycle (cyclical marketing). But that is today’s equivalent of bleeding – an old-fashioned but once widespread treatment that actually reduces the patient’s ability to fight disease.

Companies that have bounced back most strongly from previous recessions usually did not cut their marketing spend, and in many cases actually increased it. But they did change what they were spending their marketing budget on and when to reflect the new context in which they operated. Let’s begin by taking a look at the various categories of marketing costs.

R&D and new product launches

New product launches are risky even in boom times, and there is always considerable debate within any firm about which of the many new products under development should actually go to market. In this context, axing new product development projects in a recession looks like a no-brainer.

But research in contexts as different as U.K. fast-moving consumer goods and U.S. automobile markets shows that products launched during a recession have both higher long-term survival chances and higher sales revenues. That’s partly because there are fewer new products to compete with, but it also comes from the fact that companies maintaining R&D have focused the investment on their best prospects — which may explain why products introduced during recessions have been shown to be of higher quality.

Timing, of course, is important: Our research shows that the best period to launch a new product is just after a recession’s mid-point. This is when consumers start to think about non-necessities, even expensive products they don’t want to buy yet (such as cars). A new and innovative product engenders hope that the economy is on the mend, and that the consumer may soon be able to afford it.

Even if they don’t have new products ready to bring to market at the right time, smart firms continue to invest in R&D during recessions, which has been shown to have a stronger impact over long-term performance than other categories of marketing spend, such as advertising and price promotion. This is because maintaining R&D means that companies emerge from the recession with a relatively stronger pipeline, particularly in cyclical industries such as automobiles, cement, and steel.

Prices and promotions

Faced with declining sales volume, managers are tempted to increase prices in the hope of maintaining revenues and margins. It’s not hard to see why this is a bad idea: As recessions make consumers more price sensitive, any increase in price will further reduce the likelihood of making a sale, which is why firms that have raised prices soon turn to price promotions to reverse the effect.  But the research shows that this see-sawing on price backfires: Firms that engage in it lose more market share than those that don’t.

Communication

During recessions, when most firms are cutting back on their brand advertising, a firm’s share of voice increases if it can maintain or increase its advertising budget. Take the case of Reckitt Benckiser: In the recession following the 2008 financial crash, the company launched a marketing campaign aimed at persuading its consumers to continue purchasing its more expensive and better performing brands, despite the harsh economic climate. Increasing its advertising outlays by 25% in the face of reduced marketing by competitors, Reckitt Benckiser actually grew revenues by 8% and profits by 14%, when most of its rivals were reporting profit declines of 10% or more. They viewed advertising as an investment rather than an expense.

The content of advertising during recessions must reflect the challenges that consumers are encountering. Consumers in a downturn want to see brands show solidarity. Successful brand advertising during a recession not only injects humor and emotion, but also answers for consumers the question: How can we help?

Take the case of Coca-Cola.  In 2020, the company used its advertising budget to showcase the work of frontline workers, creating mini stories about unsung heroes. The Coca Cola brand features subtly in the background of these messages, reminding consumers that Coca Cola always has been, and always will be there for you, in good times and bad.

A similar tactic allowed Singapore Airlines to demonstrate how its grounded crew was redeployed to helping the community deal with the outbreak. Cabin crew used their skills as care ambassadors. Some helped nurses by taking patients’ vital signs, noting meal orders and serving them. Others worked at transport hubs assisting with crowd control and ensuring compliance with safe distancing guidelines.

Tailoring the response to the context

We all know that a company’s existing branding and size are major factors in how well placed it is to weather and even benefit from a recession. Strong brands are often better able to maintain prices in a recession.  At the same time, large companies and smart negotiators can often get price concessions from suppliers in a recession. But how a company’s positioning and capability play out — and what needs to change — will depend on the dynamics of the industry and country in question, which means that companies operating in multiple markets need to choose different strategies for different parts of the business.

Take the case of a one large Russian conglomerate that we advised during and after the 2008 global financial crisis. It operates in six countries and six industries, ranging from mainstream apparel to specialized banking. For its mainstream apparel brand in Russia, the company maintained its advertising budget, while other (mostly foreign) brands simply cut the quantity of messaging and did little to change the content of what they did release.  This worked out well for the company because its existing positioning as a local, value-for-money brand appealed to consumers at a time when spending on foreign luxuries felt and looked bad. As the recession receded, many new customers, who had switched from more expensive foreign clothing, stayed with the local brand.

The conglomerate applied a very different approach to its banking operation in Romania. Unlike most of its competitors, our client expected a deep recession and a slow recovery. In this scenario the prospects for getting in new business were poor, and so the company slashed its previously large retail advertising budget and closed a large number of retail branches. This freed up resources so that it could better support existing customers. All customer acquisition efforts, meanwhile, were focused on high net-worth individuals.  Its focus on helping existing customers and its careful targeting of new customers helped the bank to grow in the post-recession recovery period.

Marketing in a recession will never be easy, largely because it often involves going against instincts and standard operating norms. Customers’ behavior undergoes profound changes – reflecting changes in their circumstances and needs, which may even be traumatic. In this environment you must accompany your customers on their new, different journey, shifting your message and even re-engineering your value proposition. This is a time not to stop spending money but a time to change how you spend it. It is also an opportunity, because firms who are willing to be what customers need in a recession get to keep many of the new customers they get — and cement the loyalty of those they already had.

Leading Remotely Requires New Communication Strategies

Managing a team remotely during COVID-19 has presented its own set of challenges, particularly for business leaders like me who are used to having open-door policies at work. We know our employees are facing new struggles and fears. They have all sorts of questions about the direction of the company, what’s expected of them, which projects are on hold, and more.

But with the added prospects of caring for sick loved ones and kids at home while still trying to get their work done, many don’t have as much time to address these questions. This is especially true for workers who are putting in extra hours to try to help some of the most vulnerable people during this crisis.

Meanwhile, managers’ schedules are much tighter as well. Together with executives, they’re tasked with transforming daily operations and keeping the business afloat in unprecedented circumstances. And in some cases, as layoffs are on the rise, businesses are trying to get more done with fewer employees.

All this can make it especially difficult to give necessary attention to employees’ concerns. Over the last few months, I’ve begun a new system that has proven extremely productive and works particularly well with remotely located employees. This system has led to concrete changes that have resolved problems and advanced our corporate culture during the pandemic.

15-Minute One-On-Ones in a Compressed Time Frame

The system begins with scheduling 15-minute individual meetings with each team member. I try to do all of these short one-on-ones within two weeks.

As Steven Rogelberg, author of The Surprising Science of Meetings (and MIT SMR contributor), explained at TED.com, “A 10- or 15-minute meeting is a great tool that every leader should consider. Done effectively, short meetings with a focused agenda can have tremendously positive effects. Plus, they align with the existing research on limited human attention spans and fatigue.”

While these benefits can apply to group meetings, I’ve found that they’re just as powerful in individual sessions. We get straight to the most important issues that are forefront on my employees’ minds.

Holding these meetings individually, rather than in small groups, helps me ensure that I hear from everyone. Some businesses do group meetings with a round-robin approach, in which each person is given a chance to speak. But some people are naturally less inclined to be talkative when others are listening. By setting aside one-on-one time, I maximize each individual employee’s psychological safety and ensure that they know they’re heard.

By packing these individual meetings closely together, I quickly identify common themes raised by employees across the organization so I know what issues need to be addressed right away. If I were to spread these meetings out across a month, the similarities among what my employees say would be less striking. And I’d be showing them that I’m in no rush to mitigate the challenges they’re facing.

I then repeat this process every six to eight weeks.

The ‘Traffic Lights’ Emotions System

I begin each meeting with something I learned through executive coaching organized by Flourish Ventures (a venture of Omidyar Network, an investor in my company).

I first ask the employee, “How are you feeling? Factor in everything going on around you, both personally and professionally.” I ask them to answer using a traffic lights system. “Green” means everything is good; “yellow” means overall OK, but some things are causing consternation; and “red” indicates great, pressing concerns.

This system has been used to help children understand and regulate emotions. But it’s useful to adults as well. In executive coaching sessions, I’ve found it to be an opportunity to check in with myself and really consider how I’m feeling. Then, through my answer and our discussion, I’m able to think through why I’m feeling this way — and what can be done about it.

When I use this system in one-on-ones with my team members, they open up about their professional and personal challenges. While some (like me) are dealing with kids at home, others are more immediately concerned for the health of older parents they live with. Some are feeling great stress over family members’ lost jobs, while others who live alone are battling a sense of isolation.

These short meetings have helped me find ways to streamline our operations, provide employees the flexibility they need, and perhaps most important, find new ways to enhance our culture in a virtual context. I discovered that employees were missing the camaraderie they experience at our offices in Atlanta and Los Angeles. (Our remote staff generally travels to the office every month or two, so they have those interactions as well.) We implemented a Thursday social Zoom call and sent snacks to people’s homes so they could simulate a workplace happy hour.

The pandemic shows no signs of abating anytime soon, and the challenges will continue to mount. It’s crucial that leaders and managers stay on top of what our employees need in order to meet those challenges — and show our teams that their voices will continue being heard.

Building a Vibrant Entrepreneurial Community In Your City

Many cities in the country complain about the lack of entrepreneurial activity in their community. They express disappointment that they are not more like entrepreneurial hubs in San Francisco, Austin or Boston.

On the Small Business Radio Show this week, Brad Feld believes this is all wrong.

He has been a leader in the startup community since he became an entrepreneur in 1987 and then subsequently an early stage investor. Brad is also a co-founder of Techstars.

Brad Feld Interview on Entrepreneurial Cities

Brad just released the new edition of his classic “Startup Communities: Building an Entrepreneurial Ecosystem in Your City”. This book outlines Brad’s now-famous “Boulder Thesis” about how his hometown of Boulder, Colorado quickly accelerated into a world-class ecosystem for entrepreneurs. It shaped a framework for building communities of entrepreneurs who feed off each other’s talent, creativity, and support.

Brad believes that business is based on two principles.

First, every city needs a startup community for the economic health of that region.

Second, we should choose where we want to live and then build our life around that place.

Brad insists that the leaders of the start up the community must be entrepreneurs who are committed one place. They have to practice as former Governor John Hickenlooper’s says “topophilia” or love of place.

To be one of these leaders, Brad thinks that you don’t have to be overly successfully or had a large exit; you just need to be committed to your community. He adds that “no one appoints these leaders – it’s a network not a hierarchy. It’s just a bunch of people committing to interacting with each other” for the good of the city.

According to Brad, the disruption from COVID- 19 brings a fantastic opportunity for starting companies.

Entrepreneurs have always been comfortable with doing many experiments in their businesses that mostly fail. He emphasizes that “you don’t have to have it right or completely flushed out;  you just want to evolve the idea rapidly”.

Brad is not worried about the lack of capital currently available. “There has always been an environment of not enough; not enough money, capital, investors but still entrepreneurs and companies succeed,” he says.

Listen to the entire interview on the Small Business Radio.

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Image: Brad Feld


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