Two weeks ago I wrote a post about setting the marketing budget.  It described the often very basic rules marketers use to make multi million dollar investment decisions in marketing.  It also had data from a recent McKinsey survey showing that although 45% of the companies were planning to reduce their budgets, 27% had no changes planned, 20% of companies were planning to increase their budget and 9% didn’t know.  What can we learn from past recessions that can help us spend our marketing dollars better during this one?

Over the last months professional marketing literature has been dominated by material advising marketers on what to do during a recession.  A lot of that material covered rules and recommendations about how marketing budgets should be set or adjusted during recessions.  Reading through it I noticed very little new thinking.  Most of the articles were either reruns of material that was written after past recessions or they are articles that use the same methodologies used in those articles on more recent data. 

The most popular methodology used to demonstrate what happens when advertising budgets get cut during a recession compares companies that cut their advertising to those that held their spend stable or even increased it.  Performance of these companies is then compared during the recession and in a period after that. 

This methodology was 1^st tried out in the 1920’s by Roland S Vaile.  He published his results in the Harvard Business Review issue of April 1927.  Vaile compared companies that maintained their advertising spend during the 1923 recession to those that cut their budgets.  He found that the biggest sales increases were recorded by companies that advertised the most.

Buchen Advertising Inc. applied the same methodology to 4 recessions in the 40’s, 50’s and 60’s.  They were able to show that companies who cut their budgets during the recession not only performed worse during those recession but also in the subsequent years of recovery.

In 1982 Cahners Publishing Company published the results of an analysis of the Profit Impact of Marketing Studies (PIMS) database which then held information for almost 2000 companies.  They showed that companies who increased their budgets during a recession gained on average 1.5% in market share during those periods.

Similar research was done by Biel (1991), Hillier and Baxter (2001), Buck (2001).  The most recent example was presented at an IPA conference in 2008.  Malik consulting repeated the analysis Hillier and Baxter did in 2001 on more recent data.  The conclusion was very similar to all of the studies mentioned so far.  Companies who increase their budgets during a recession show increases in market share and return on capital employed (ROCE) in the years after the recession. 

While the observations in all these studies are accurate, I often feel nervous about the recommendations derived from them.  Most people claim these studies make a case for increasing investments during a recession to outmuscle weaker competitors and gain market share that can lead to a sustained advantage during the recovery and beyond.  This implies causality and none of the studies above delivers proof of this.  Do companies who spend more during a recession perform better in the long run because they increased their spend?  Or are companies who perform well before, during and after a recession better placed to maintain or increase their spend during a recession?  Some of the authors acknowledge this issue of potential reverse causality.  Few offer an alternative approach. 

I believe a more thorough approach is required to make the case for sustained marketing investment during tough economic times, especially if we want the arguments to stand up to the scrutiny of already skeptical CFO’s and CEO’s.  Three things can help here :

1. Increase the use of econometric modeling

2. Take a holistic view of the marketing plan

3. Determine the long term effects of marketing 

Increase the use of econometric modeling : Econometric modeling has been around for a long and it’s power in helping marketers understand what works and what doesn’t has been demonstrated over time.  Today however it’s use is still fairly limited.  Only 15% of the case studies submitted for the IPA awards use econometric modeling to identify the effects of campaigns.  The most often quoted paper that uses econometric modeling to make a case for sustained investments throughout a recession is probably Cutting Adspend in  Recession Delays Recovery by Dyson in 2008.  The article uses econometric modeling to prove exactly what it’s title says.  Dyson showed that “the increased spend required during the recovery just to get back to pre-recession sales levels within a year will have to be around 60 per cent higher than the amount saved by cutting the ad budget in the first place”. 

Take a holistic view of the marketing plan : Let’s say you have build econometric models that give you a clear sight into what would happen if budgets are cut.  One would still need to take into account media costs and consumption.  Media costs often fall during a recession.  Simon Broadbent (1999) gave a very interesting example which demonstrated the impact of cost savings due to falling media costs.  This in one example leads him to recommend increasing spend during the recession of the early 90’s.  There is also evidence that media consumption can change during a recession.  People stay home and consume more media, which could increase the efficiency of media spend during tough times.  Clearly an approach like this which uses modeling and takes into account the specific context of the brand, the category and the media landscape is much more thorough and easier to defend than the one size fits all golden rules described earlier.

Determine the long term effects of marketing : Budget cuts during a recession are often the result of a short term view.  Advertising efforts rarely pay themselves back in the short term.  As described in a previous post on the long term effects of advertising, 5 recent studies showed that every 1$ spent on advertising on average only generates 50c in payback in the short term (Dyson 2008).  However, there is growing evidence that the long term effects could be 2-6 times the size of the short term effects.  Broadbent (1999) called quantifying the long term effects of advertising the most important task facing advertising researchers.  He said that a lot of work still needs to be done in the area and that this work shouldn’t just be done in tough times.  The understanding of long term effects is incredibly important as it can impact shareholder value.  According to Barwise (1999) it is a myth that financial markets only care about short term financial results.  They tend to maximize long term shareholder value.  It is therefore up to the marketing community to demonstrate that long term shareholder value is not only a function of short term financial performance but also of sustained longer term investment in the brand.

References

P Barwise, Advertising for Long term Shareholder Value, Admap Magazine October 1999

A Biel, The cost of cutbacks, Admap Magazine 1991

S Broadbent, Tough Times, Admap Magazine April 1999

S Buck, The true cost of cutting adspend, WARC, January 2001

P Dyson, Cutting adspend in a recession delays recovery, WARC Online, March 2008

P Field, Marketing in a downturn: Lessons from the past, Market Leader, Issue 42 2008

T Hillier & M Baxter, How to prevent a hangover, Market Leader, Issue 14, 2001

B Ryan, Advertising in a Recession, AAAA, Value of Advertising Committee, 1991

Yesterday was Memorial Day in the US  - the official start of the summer BBQ season and everyone seemed to have their grill out in the city.  I had a few friends over for a BBQ and decided to prepare a smoked brisket.  I followed the instructions of this enthusiastic grill master and slowly cooked an 8 pound brisket for 8 hrs on the charcoal grill.  8hrs … that’s right – a lot of time to spend on your own by the BBQ.  My mind started wandering after a few hours and I caught myself thinking about all sorts of things, the analogy between slow cooked meat and the long term effects of advertising being one of them.  It’s not a great analogy – I admit.  It takes time to slow cook a brisket just like it takes time for advertising to truly affect behavior.  That’s about where the comparison ends.

Paul Feldwick¹, former global planning director of DDB, used a much better metaphor.  He once said brands need to go to the gym if they want to be big strong and healthy and he described how brands are built through repetition over a longer period of time – very much in the same way people build muscles.  This metaphor seems to be supported by empirical evidence.

Fact 1 : Advertising efforts rarely pay themselves back in the short term. 

Dyson (2008)² gives an overview of 5 recent studies that show that every 1$ spent on advertising on average only generates 50c in payback in the short term.

Most advertising efforts don’t pay back in the short term.  Going to the gym doesn’t pay off initially either.  It cost a lot of money and effort and you get can see very little results in the short run.

Fact 2 : Advertising’s long term effects are substantial

Plenty of evidence exists that the long term effects of advertising can be substantial.  The most famous and most often quoted piece of research was published by IRI⁶ in 1992.  They selected 44 advertising tests that generated significant results in the 1^st year and that received no additional advertising support in the 2 subsequent years.  The average incremental sales of these tests in year one were 22%.  The incremental effects in year two were 14% and in year three 7%.  This means that the long term effects (year 2 + year 3) doubled the overall impact of the results.  IRI also found that long term resulted from existing buyers buying more or more often rather than new buyers coming into the franchise.  This suggests that the advertising caused trial which resulted in short term effects and that some of the customers who tried would continue to buy as a result of a positive experience, resulting in longer term effects.

The following table gives an overview of some of the evidence for the existence of long term advertising effects :

The examples above all demonstrate that the sales effects of advertising can carry on in the long run.  Advertising can also impact long term price elasticity.  This means that brands can maintain a higher price level as a result of advertising.  A good example of this is the work done by OHAL¹⁰ in the UK sanitary protection market where prior to 1990 no TV advertising was allowed.  They found that customers were les price sensitive after advertising was allowed than before.  The price elasticity dropped from 2.5 to 2.

Other evidence for long term advertising effects comes from cases studies of individual brands such as Andrex¹¹, BMW¹², PG Tips¹³ and Stella Artois¹⁴.

It’s clear that the long term effects of advertising can be just as substantial as the transformation your body will go through over time if you start going to the gym 4 times a week.

Long term effects are rarely measured

Because the long term advertising effects can be so large, omitting them from measurement can easily lead to wrong decision making.  Broadbent (1999)¹⁵ called quantifying the long term effects of advertising the most important task facing advertising researchers.  He said that a lot of work still needs to be done in the area and that this work shouldn’t just be done in tough times.  In spite of the obvious importance of quantifying long term advertising effects very few companies are doing this.  This is for the following reasons : 

Measuring long term effects is hard : In the long term, many factors other than advertising impact consumer behavior, not the least the consumer’s experience with the brand itself.  This makes it very hard to isolate the long term effects of advertising.  It usually requires advanced econometric modeling and long term in market tests set up with “clean” experimental design.

Long term insights are not always immediately actionable : Marketers cannot wait one to three years for results on long term effects to become available.  They need to make decisions almost instantaneously.  This means that in order for long term measurement to affect decision making today it should be focused on finding predictors of long term performance that can be observed in the short run.  This adds to the complexity.  Measuring alone is not enough, prediction is required for the work to be actionable.

The abundance of short term data : The advent of digital has made a lot of data available that is enthusiastically being used by marketers to better understand performance.  Most of this data is available with the speed of light which means it can be used to get a very quick read on a campaign’s short term results.  This however has shifted the focus of most marketing analytics efforts to the short term.

Short term pressures : There is currently little appetite for the long term view on marketing performance.  Marketing budgets are under pressure and marketers are forced to demonstrate pay back – preferably in the short term.

Shareholders care about long term effects

One common misconception is that shareholders don’t care about the long term.  Barwise¹⁶ gives seven proof points of how shareholders are most interested in maximizing long term shareholder value.  Perhaps the most compelling proof point is the substantial value they attach to intangible assets and brand value as illustrated by the graph¹⁷ below.

So we know that advertising hardly pays back in the short term but that it can generate substantial returns in the long run.  We also know that, contrary to common belief, shareholders care about long term effects of advertising on business performance.  Advertising, as an industry, would therefore probably do well with creating a much better understanding the long term effects of their efforts. 

REFERENCES

1.P Feldwick, Building Brand Muscle, Admap, July 2002

2. P Dyson, Cutting adspend in a recession delays recovery, WARC Online, March 2008

3. M Campbell: Is ROI dead?, Admap, March 2005 

4. Deutsche Bank: Commercial noise – why TV advertising does not work for mature brands, Ad Age, May 2004

5. A Ruffle, ROI: A passing fad or enduring trend? Admap (China Supplement), February 2007

6. E Ephron & G Pollack, The curse of Lord Leverhulme, Admap, July/August 2003

7. L Lodish & B Lubetkin, General truths? Nine key findings from IRI test data, Admap, February 1992

8. M Hess & G Ambach, Short and Long-term Effects of Advertising and Promotion, American Association of Advertising Agencies, 2002.

9. S Broadbent, What Do Advertisements Really Do for brands?, International Journal of Advertising, Vol. 19, No. 2, 2000

10. P Baker, Surely there are lasting effects of advertising?, Admap July 1999

11. Andrex sold on a pup, M Stow, IPA Awards, 1992.

12. T Broadbent, BMW how 15 years of consistent advertising helped BMW treble sales without losing prestige, IPA Awards, 1994.

13. C Cooper, L Cook and N Jones, PG Tips how the chimps have kept PG Tips brand leaders through 35 years of intense competition, IPA Awards, 1990.

14. P Brown, Stella Artois reassuringly profitable, IPA Awards, 2000.

15. S Broadbent, Tough Times, Admap April 1999

16. P Barwise, Advertising for Long Term Shareholder Value, Admap 1999

17. P Doyle, How Shareholder Value Analysis Re-defines Marketing, Market Leader 2000