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Avoid the Temptation to Cut Marketing Budgets to Balance the Books

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The Nielsen Company has just released data that shows advertising expenditure in the US fell 15.4% in the first half of 2009. A total of $56.9 billion was spent on advertising in the first six months of the year, $10.3 billion less than the same time period in 2008. All evidence that in times of recession, marketing budgets are amount the first to be cut. But, cutting marketing budgets to balance the books is a bad idea. Here's why.

Why are marketing budget cuts? Well, we all understand that marketing expenditure is not directly tied to the immediate production of output. What this means is that marketing budgets are among the first to be cut when managers are trying to find ways to drive down costs in order to retain shareholder confidence and stay afloat. Because marketing expenditure is treated as an annual expense, managers often justify the decimation of marketing budgets on the basis that the effects will only be felt in the current year. The view is that once the recession ends we can return to our previous levels of marketing expenditure -- that is, we can pick up where we left off without having damaged our brands at all.

It turns out that marketing expenditure does influence the long-term value of the firm. One day (when I had nothing else to do), I decided to pull together a database to enable me to examine firm performance during the last big recession - the 1980s recession. I measured firm performance in 1979, which is the year before the recession began, measured marketing expenditure during the recession and then measured firm performance one year and five years after the recession ended.

I found that firms that spent more on marketing than their peers during the recession enjoyed a higher market value five years after the recession ended. To me, this result provides clear evidence of the long-term effects of marketing expenditure.

This result is important because during a recession, not only are marketing budgets being cut but also marketing managers are reconfiguring how to allocate marketing funds. What this means is that during a recession, it is tempting is to focus marketing expenditure on areas likely to result in short-term gain (for example, discounting prices, offering coupons and other sales promotions, or using direct response advertising which makes it easier to measure marketing effectiveness), without paying any attention to the maintaining and building the long-term value of the brands.

And so what do I recommend? Right now, managers should resist the pressure to cut marketing budgets and resist the pressure to focus mostly on marketing activities that generate short term gain. The recession will end and firms that come are stronger will be those firms that clearly understand the contribution of brands to the long-term value of the firm. Now that's interesting.


Jenny Darroch is on the faculty at the Drucker School of Management. She is an expert on marketing strategies that generate growth. See www.MarketingThroughTurbulentTimes.com