You hear the truism that it’s important to keep advertising even when business is poor and market conditions are bad, but the instinct for self-preservation and the fear of the unknown often compels companies to cut their marketing spend deeply when times are tough.
There’s a human reason for this. Marketing and advertising are a variable expense. It’s easy to pull an insertion order. Your people and your infrastructure are fixed expenses. It’s painful to tell someone you don’t have a job for them any more, or to let go of resources that you’ve built up painstakingly over the years.
In the April 20 edition of the New Yorker, financial writer James Surowiecki takes a look at the impact of maintaining your advertising investment during a downturn. The conclusion: advertising isn’t a variable cost. It’s the investment that allows you to provide jobs for people and maintain your infrastructure.
Surowiecki cites the growth of Kellog’s packaged cereals during the Great Depression.
But Kellogg doubled its ad budget, moved aggressively into radio advertising, and heavily pushed its new cereal, Rice Krispies. (Snap, Crackle, and Pop first appeared in the thirties.) By 1933, even as the economy cratered, Kellogg’s profits had risen almost thirty per cent and it had become what it remains today: the industry’s dominant player.
Several studies show the impact of continuing to invest in advertising and marketing during economic downturns. One study shows of the 1981-82 recession ” found that sales at firms that increased advertising or held steady grew precipitously in the next three years, compared with only slight increases at firms that had slashed their budgets.”
Why does this happen? During a recession there is a scarcity of advertising relative to the abundance during an economic boom. Fewer advertisers mean that the ones who keep doing business will stand out to consumers. Consumers continue to consume, although at a lower rate; they continue to respond to advertising, although at a lower rate. The company that keeps their message out in front of the consumer, even at the cost of reduced short-term profits, is going to do more business than the company that doesn’t.
Why would companies cut their budgets then, if the reward for maintaining them is so clear cut? It’s the difference between taking an informed risk and doing something uncertain. During a recession, uncertainty dominates the market. You don’t know how consumers are going to respond, you don’t know whether things will go back to the way they were before. Cutting advertising is an easy way to cut expenses. It improves your short-term return. But, it compromises your ability to grow long-term.
Surowiecki frames the parameters of the gamble.
The record is also full of forgotten companies that gambled and failed. The academics Peter Dickson and Joseph Giglierano have argued that companies have to worry about two kinds of failure: “sinking the boat” (wrecking the company by making a bad bet) or “missing the boat” (letting a great opportunity pass). Today, most companies are far more worried about sinking the boat than about missing it. That’s why the opportunity to do what Kellogg did exists. That’s also why it’s so nerve-racking to try it.