Back in 1990 Stephen King, who passed away in 2006, published a pioneering
study on advertising spend during a downturn.
His conclusion: that businesses which cut advertising would be long-term
losers
KING STARTED out by defining a recession in a specific market as a time when
short-term growth lags the long-term trend by at least four percentage
points. With this definition in hand, he looked at data from some 749
companies in the Profit Impact of Market Strategy (PIMS) database, provided
by the Strategic Planning Institute, covering four years or more for each
company.
The first conclusion was the predictable one that companies increase their
Return on Investment (ROI) when the market expands, while their profits fall
when the market contracts.
During recession, the data showed that only a third of companies cut their
advertising spend - by an average 11 per cent - while two thirds increased
it; Around 60 per cent of those increasing spending did so modestly, by an
average 10 per cent; the remaining 40 per cent made a big increase, average
49 per cent. All the businesses saw a reduction in their ROI during the
recession, albeit it was slightly greater (-2.7 per cent) for the big
spenders, than for those who cut their advertising (-1.6 per cent). This
caused King to note: "...businesses yielding to the natural inclination to
cut spending in an effort to increase profits in a recession find that it
doesn't work."
"Businesses that cut their advertising expenditures in a recessionary period
lose no less in terms of profitability than those who actually increase
spending by 10 per cent"
However, when he looked at market share, King found that marketers who cut
their spending lost an average of 0.1 per cent of the total market, while
those that made a significant increase in advertising spend saw their market
share rise by an average of 0.5 per cent of the market. And the implication
of this is that their profits would be greater in future.
King summed up these findings as follows: "In general, virtually all
businesses see reduced profits when their market is in recession. But
businesses that cut their advertising expenditures in a recessionary period
lose no less in terms of profitability than those who actually increase
spending by an average of 10 per cent.
In other words, cutting advertising spend to increase short term profits
doesn't seem to work. More importantly, the data also reveal that such a
moderate increase in advertising in a soft market can improve share. There
is a substantial body of evidence showing that a larger market share
generally leads to higher return on investment.
For the aggressive marketer, the data suggests that a more ambitious
increase in expenditure, although reducing profit short term, can take
advantage of the opportunity afforded by a recession to increase market
share even further.
The PIMS data indicate that consumer marketers increasing their spending by
an average of 48 per cent win virtually double the share gains of those who
increase their expenditures more modestly. While this aggressive increase in
advertising is associated with a drop in ROI of 2.7 per cent in the
short-term, it may nevertheless be acceptable to the marketer looking ahead
to post-recession growth."
Options and Opportunities for Consumer Businesses: Advertising During a
Recession, by Alexander L. Biel and Stephen King. The Center for Research &
Development 1990.
study on advertising spend during a downturn.
His conclusion: that businesses which cut advertising would be long-term
losers
Why advertising pays in a recession
KING STARTED out by defining a recession in a specific market as a time when
short-term growth lags the long-term trend by at least four percentage
points. With this definition in hand, he looked at data from some 749
companies in the Profit Impact of Market Strategy (PIMS) database, provided
by the Strategic Planning Institute, covering four years or more for each
company.
The first conclusion was the predictable one that companies increase their
Return on Investment (ROI) when the market expands, while their profits fall
when the market contracts.
During recession, the data showed that only a third of companies cut their
advertising spend - by an average 11 per cent - while two thirds increased
it; Around 60 per cent of those increasing spending did so modestly, by an
average 10 per cent; the remaining 40 per cent made a big increase, average
49 per cent. All the businesses saw a reduction in their ROI during the
recession, albeit it was slightly greater (-2.7 per cent) for the big
spenders, than for those who cut their advertising (-1.6 per cent). This
caused King to note: "...businesses yielding to the natural inclination to
cut spending in an effort to increase profits in a recession find that it
doesn't work."
"Businesses that cut their advertising expenditures in a recessionary period
lose no less in terms of profitability than those who actually increase
spending by 10 per cent"
However, when he looked at market share, King found that marketers who cut
their spending lost an average of 0.1 per cent of the total market, while
those that made a significant increase in advertising spend saw their market
share rise by an average of 0.5 per cent of the market. And the implication
of this is that their profits would be greater in future.
King summed up these findings as follows: "In general, virtually all
businesses see reduced profits when their market is in recession. But
businesses that cut their advertising expenditures in a recessionary period
lose no less in terms of profitability than those who actually increase
spending by an average of 10 per cent.
In other words, cutting advertising spend to increase short term profits
doesn't seem to work. More importantly, the data also reveal that such a
moderate increase in advertising in a soft market can improve share. There
is a substantial body of evidence showing that a larger market share
generally leads to higher return on investment.
For the aggressive marketer, the data suggests that a more ambitious
increase in expenditure, although reducing profit short term, can take
advantage of the opportunity afforded by a recession to increase market
share even further.
The PIMS data indicate that consumer marketers increasing their spending by
an average of 48 per cent win virtually double the share gains of those who
increase their expenditures more modestly. While this aggressive increase in
advertising is associated with a drop in ROI of 2.7 per cent in the
short-term, it may nevertheless be acceptable to the marketer looking ahead
to post-recession growth."
Options and Opportunities for Consumer Businesses: Advertising During a
Recession, by Alexander L. Biel and Stephen King. The Center for Research &
Development 1990.
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