I’ve always been very interested in internal branding. The ‘War for Talent’ as McKinsey called it, seems to be one of the greatest of CEO concerns.

Brands help morale. This makes intuitive sense. People feel proud working for a great brand, so it helps recruit, retain and motivate people.

You can argue that most brands, to some extent, these days are service brands. Even General Motors, the quintessential manufacturing company, earns over two thirds of its profits from servicing and financing.

However, there’s surprisingly little data on internal morale. Even large sophisticated companies measure very little. Even if they do, they do it sporadically, often when something goes wrong. It’s also very hard to put the data in context – either by comparing the scores to similar companies or tracking them over time.

I recently discovered Glassdoor.com, which is an excellent source of (admittedly pretty rough) data on the subject. It’s a job review site, where employees go to rank their companies, disclose their salaries and bitch about their employers. Its putative purpose is give information to job applicants . But the real motivation for most, I imagine, is simply for people to let off steam. No matter! Information wants to be free and this is a great example of the internet opening up metrics to the world.

This is a snapshot I quickly built on the pharmaceutical category:

Sample sizes are small. (Maybe they’ll grow over time.) But they’re usually robust enough to be able to do something with. This picture is pretty clear, for example and I believe it. (Pfizer and Wyeth are about to merge.)

At least we’re measuring something that was previously not thought to be measurable.

This is even more powerful if you correlate it to brand strength. There’s nearly always a correspondence. And it’s more powerful yet if you track it over time.

Welcome to the age of transparency!

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

A couple of weeks ago, McKinsey came out with the results of their study on “Measuring Marketing”.  In one of their questions they asked whether companies planned to change their marketing budget in the next 12 months.  The results are displayed below.

While the overall picture is negative, I was surprised by the spread of these answers.  45% of the companies were planning on reducing their budgets, 27% had no changes planned, 20% of companies were planning on increasing their budget and 9% didn’t know.  What is driving these widely different investment strategies?  I would like to think that they are the result of thorough analysis and deep understanding of what the effect is of different marketing investment levels on business performance.  However, something tells me this is probably not the case. 

The truth is that very few companies understand the business impact of spending more or less on marketing.  When it comes to setting the marketing budget, most of them use very arcane and rudimentary methods to make multi-million dollar investment decisions.  Below is an overview of some of the most popular methods.  It’s a long list but it’s by no means exhaustive (if you know of any other articles please post them below).  I do think it captures most of the methods companies use today.

1979 – Harry’s Rules

Exactly 30 years ago Harry Henry published an article in the Cranfield Broadsheet that described 15 approaches to determine how much to spend on advertising.  They are :

1.      Intuitive / rule of thumb – “enough to do the job” based on experience

2.      Maintaining previous spend, sometimes inflation adjusted

3.      Percent of previous sales – backward looking, compounds failure (or rewards success)

4.      “Affordable” – what’s left after cost and profit requirements are met

5.      Residue of last years profits – focuses on source of funds, not their use

6.      Percent of gross margin – begs question of cost efficiency

7.      Percent of forecast sales – most common method used

8.      Fixed cost per unit of sales – like % of turnover

9.      Cost per customer/capita – mostly business to business

10. Match competitors – assumes they are right

11. Match share of voice to brand share – like the above

12. Marginal return – direct response approach

13. Task approach : define objectives and cost out how to reach them – best in theory but may require modeling

14. Modeling – the most sophisticated approach: not easy

15. Media weight tests – looks empirical but usually difficult to evaluate or replicate.

Ten years later, Simon Broadbent included a very similar list in his book The Advertising Budget (1989). 

2003 – Harry’s Rules Revisited

In 2003 Gullen wrote an article in Admap where he introduced 5 steps to effective budget setting.  He categorized the budget setting approaches in 5 independent schemes or “budget bearings” as he calls them :

1.      Inertia bearings based on usual practices (ie last year’s budget maybe adjusted for inflation)

2.      Business bearings based on sensible ratios within the business plan (eg affordability, advertising to sales/volume/margin ratios)

3.      Media bearings based on the cost of fulfilling a sensible media plan (eg. Cost of media plan to achieve goals)

4.      Competitive bearings based on the spend of competitors (eg match share of voice to share of market)

5.      Dynamic bearings based on the observations of apparent effects of previous advertising activity (eg. in market tests, econometric modeling)

2004 – Harry’s Rules Revisited again

In 2004 Dyson wrote another Admap article on “How to budget better”.  He outlined 7 categories of methods :

1.      percentage of sales : the ad budget is a proportion of last year’s actual sales, or next year’s forecast sales

2.      objective and task : objectives are set (turnover, profit, growth) and the budget required to meet these objectives is estimated

3.      competitor : the amount spent by competitors is used as a yardstick; a version of this is the well-known rule of thumb that share of voice should be at least equal to share of market

4.      affordability : the budget is the amount left after everything else has been accounted for

5.      historical : do the same as last year, with an adjustment for inflation

6.      executive judgment : basically guesswork, but probably an informal use of one or more of the above.

7.      brand led : a more scientific approach that uses research data and econometric modeling.

2006 – Harry’s Rules Revisited one more time

Finally in 2006 Green published an article on “How much should I spend on advertising?” on WARC.  He said that there are roughly 2 categories:

1.      Task based approaches that start with the financial goals of the brand (eg rules 1-11 in Harry’s list).

2.      Resource based approaches that start with what resources are available or assume that what a company has been doing in the past will work in the future brand (eg rules 12 and 13).

As you can see, the methods for setting the marketing budget haven’t really changed in the last 30 years.  Dyson quotes research that shows that “advertising as a percentage of sales” is by far the most popular methodology (53% of companies seem to use this approach).  That is scary!  But it confirms my personal experience.  Scientific methods, some of which have been around for a long time and are tried and tested, often seem to play only a very small part in the budget setting process.  Marketers tend to stick to the methods they know, even if they know they might be over-simplistic or even wrong.  

Will the current recession force them to adopt more scientific methods?  I think it will.  It has put the spotlight on the marketing budget and there is no place to hide.  But over the last 30 years marketers have created some bad habits that might prove to be hard to break.