Advertising through economic downturn
An inevitable economic downturn has marketers assessing the potential value and risks of investing in advertising in a post COVID-19 world. Natalie Stanbury from the Interactive Advertising Bureau (IAB) has compiled research studies from global resources to assist businesses as they contemplate future marketing spend during a recession.
As Australians start to enjoy the beginning of COVID-19 lockdown restrictions lifting, the first real signs of the economic downturn are being revealed. Marketers face some tough decisions as they navigate how to balance shorter-term sales expectations with brand communications that are critical for business success, to ensure they remain competitive and in the best possible position through the economic trough and into recovery.
The general wisdom supported by a considerable body of marketing research collected over many years is that continued advertising investment during a recession can make a company and its brands stronger. And that those who don’t face often surprising but certainly detrimental effects down the track.
IAB has synthesised a number of important research studies to provide marketers with five key areas to consider as they plan how and where to invest their marketing spend through the economic downturn.
- Media investments follow the rises and falls in GDP with more extreme movements
The International Monetary Fund (IMF) has forecast the Australian economy will shrink 6.7 percent this year, with a recovery of 6.1 percent expected next year. Even with this sharp uptick, there will be some challenging economic years ahead, with PWC’s Australia Rebooted 2020 forecasting a ‘best case’ exit path taking a little over two years to recover to pre-COVID-19 GDP levels.
Our IAB Online Advertising Expenditure Report from PWC for the quarter ending March 2020 found that digital advertising expenditure had already slowed in this first quarter reflecting the traumatic summer season of bushfires and drought, compounding the traditional post-Christmas advertising decline. Of course this was pre-COVID and so in April, we engaged with advertisers and agencies with a COVID-19 Digital Ad Impact Survey to understand their ad investment intentions for the coming months. 21 percent of respondents indicated they had paused all their ad spend, 57 percent had decreased some of their spend. We are now working on wave 2 of that survey and data collected in mid-May shows that approximately 50 percent of advertisers who had previously pulled spending are now back in market investing, though at mostly at a reduced level.
While marketers are naturally focussing on managing through the immediate COVID-19 lockdown period and the initial crisis recovery, it’s important to look ahead. Often the immediate response in tough times is to cut costs and focus on what brings in immediate revenue, but there is a great deal of marketing analysis across the years that suggests this could be a detrimental decision.
- There is a cost to turning off media investment
Many studies report that cutting marketing investment during downturns can have greater negative effect in the longer term including not regaining sales and profit of pre-downturn levels, loss of market share and loss of brand salience.
Harvard Business Review has just released the findings of the corporate performance of 4,700 public companies across three global recessions over three different periods: the three years before a recession, the three years after and the recession years themselves. The findings are compelling:
- Three years after a recession, 80 percent of companies had not regained their pre-recession growth rates for sales and profits; 40 percent of them hadn’t even returned to their absolute pre-recession levels of sales and profits by the end of that time period.
- Companies that cut costs faster and deeper don’t necessarily flourish. They actually have the lowest probability—21 percent—of pulling ahead of the competition when times get better.
- The best performers post-recession are companies that find the delicate balance between reducing costs selectively, with a focus on operational efficiencies and, at the same time, invest relatively comprehensively in the future by spending on marketing, R&D and new assets.
Econometric consultancy Data2Decisions modelled budget-cutting scenarios for a typical brand and found if budgets are cut for one year and then returned to normal, the sales recovery can take five years. By contrast, if the budget was halved for one year, it would take three years for sales to recover to pre-cut levels. The consultancy also noted that following a budget cut, the brand will continue to benefit from the previous year’s marketing investment, so business harm won’t be noticed at first and the longer-term business harm will be more considerable.
Analytic Partners reported that a brand that reduces its media spend in 2020 by $50 million will on average stand to lose $130 million in revenue in 2020 alone. When factoring in the long-term implications of this reduction, the number increases to well over $300 million.
Ebiquity reporting data from Malik PIMS (Profit Impact of Market Strategy) collected from around 1,000 business units in developed economies during periods of market downturn and subsequent market recovery, found that advertisers that cut their spend found their market share fell 0.7 percent points. On the flipside advertisers that boosted spending levels in a recession gained 1.6 percent points in market share in the first two years of recovery.
Kantar brand guidance data has shown that brands can cut media investment without immediate deleterious effect, it is only for a few months, noting that after 6 months the net change in total brand communication awareness (the percentage of brands experiencing increasing scores minus the percentage of brands experiencing decreasing scores) after cutting TV advertising is -39 percent.
Peter Field, marketing consultant for the IPA examined the relationship between share of voice (SOV) and share of market (SOM). The headline summary was that a brand can expect to lose one point of market share for every ten points it allows its SOV to fall below its SOM. So cutting advertising budgets and SOV during a recession is risky as the subsequent loss of market share that follows will be difficult and expensive to regain.
- Strong brands help businesses to survive turbulent times
Twenty-two years of BrandZ data analysis consistently confirms that strong brands help their businesses to survive turbulent times, noting that brands with the strongest brand equity recovered nine times faster following the financial crisis of 2008.
Kantar’s Total MROI database analysis has proven that strong brands build growth in the future as well as driving sales today. Indeed brand is a multiplier of ROI, more than doubling the impact of media investment on sales. On average, media investment directly contributes on average 13 percent of sales today, while 28 percent of a brand’s sales delivered today are driven by its brand equity.
Analytic Partners also recommends during challenging times a focus on brand equity messaging can be the smartest move, noting that brand equity and messaging that focuses on the values of a brand outperform product, promotion or functionality messaging 80 percent of the time.
Ipsos assert that building stronger emotional engagement shows greater potential to further drive brand equity than promoting product superiority, which runs the risk of being disconnected from how people are thinking and feeling during the current uncertainty and beyond.
- Use a combination of media channels to drive great ROI
There is a body of evidence to support that the combination of media drives greater ROI than one specific media on its own. Analytic Partners meta-analysis shows adding multiple touchpoints increases ROI significantly – up to an additional +35 percent for five channels.
- Invest in creative quality to ensure your ad dollar works to its highest potential
Kantar analysis of its global database of cross-media studies shows creative quality contributes half of campaign impact, followed by reach and frequency. As always, design creative with context in mind. Optimising assets to work their hardest makes your ad dollar work to highest potential.
Natalie Stanbury is the director of research at IAB Australia.