A view from Ross Farquhar

Step up now to avoid or minimise the economic damage of recession

Marketing expenditure is an investment, not a cost, and should be seen as such when considering where to slash funding, writes Ross Farquhar, the partner...

With a recession looming, the need to step up has never been greater. These are bleak times to be British, and not just because Rio serves to remind us of how long it’s been since we were collectively buoyed by the hope and optimism of the London games.

Mark Carney just predicted Brexit would lead to 250,000 jobs being lost as he slashed his growth forecast for Q3 to a paltry 0.1%. The National Institute of Economic and Social Research predicts there is a 50% chance of the UK falling into recession in the next 18 months.

Farah and Ennis-fuelled elation feels like a distant memory.

Experience tells us that in such times marketing and advertising expenditure is all too often seen as a cost to be cut rather than an essential investment. Yet marketing is the "demand generation" department, and at no other time is demand generation more necessary than during a slowdown.

We start on the back foot. Peter Field’s most recent analysis of the IPA databank suggests that our industry lost the argument last time around – there has been a material swing towards short-termism and the misuse of advertising for immediate effects, and a trend towards creative work being backed by declining budgets.

The net impact is a reduction in the effectiveness of what we do. This is a situation that cannot be allowed to continue, and it’s time to take steps to either avoid or minimise the economic damage of recession.

1. Get to know the evidence

There is an abundance of evidence that suggests marketing is a good bet during a recession. As the cost of media weakens and competitors cut their spend, excess share of voice grows and marketing’s ROI over the medium to long-term follows.

Conversely, any cut in spend tends to produce only a minor boost to the bottom line in the short run, while research shows firms that do so tend to see a 20%-30% reduction in income over the next two years as a result. 

Shifting investment from advertising and into price promotions produces seductive short-term volume boosts but is rarely profitable overall, and creates damage that will be costly to repair once the recession ends.

These are the drums every person interacting with finance and general management colleagues should be banging.

2. Reframe advertising from cost to investment

When advertising is viewed as a cost, it is as legitimate to cut as any other overhead. When it is rightly classified as an investment with demonstrable return, its necessity in challenging times is less open to question.

It is here where marketers need to stop talking their own language, pleading with their colleagues on the basis of the impact on "brand awareness", "engagement" or "preference", and start talking the language of the boardroom.

Marketing in the Era of Accountability provides all the necessary fodder to demonstrate that advertising returns in profit terms, and does so best over a long-term time horizon – often up to five years.

For this reason recessions are dangerously deceptive – a firm may not experience an immediate hit from making a cut as it continues to benefit from past expenditure, but two years down the line and as the context changes profitability is hit hard.

This is why all the evidence suggests that firms who increase their excess share of voice during a recession by maintaining or even growing their investment win. McKinsey & Company have demonstrated that the markets reward those who do so in stock valuation, while Stephen King’s analysis of the PIMS database demonstrates that such a strategy leads to share gain.

Given the habitual nature of customer behaviour that share gain leads to greater profitability as the recession ends.

This is why marketing expenditure is an investment, not a cost, and should be seen as such when considering where to slash funding.

3. Start sowing the seeds now

As the recession hits, the CEO and CFO will be met with pleas for budget protection from all quarters, and at that point the task of winning the argument for marketing becomes much, much harder. It is easier to change an opinion with the benefit of time and perspective than it is when the need for tough decisions is pressing.

Now is the time for marketers and their agency partners to make the case. It is also time to get our houses in order – have we been as thorough as we should in proving the effectiveness of our expenditure to date? Have we invested in econometric modelling to eliminate doubt? Specific evidence always beats general best practice.

None of this is easy, but the consensus on marketing and advertising’s value is never more under threat than in times of economic stagnation. Now is the time to get ahead of it.