The Marketing Executives Group International

By: Dr. Jenny Darroch - http://www.linkedin.com/in/jennydarroch

The Nielsen Company recently released data showing that 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 period in 2008. All evidence to confirm what we already knew: during recessionary times, marketing budgets are amont the first to be cut.

Why are marketing budget cuts? Well, we all understand that marketing expenditure is not directly tied to the immediate production of output and so 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.

But, cutting marketing budgets to balance the books is a bad idea. As it turns out, 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 was 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 on firm value.

This result is important because during a recession, not only are marketing budgets being cut but also marketing managers are reconfiguring the allocation of marketing funds. What this means is that during a recession, it is tempting is to focus marketing expenditure on areas that are likely to result in short-term sales (for example, discounting prices, offering coupons and other sales promotions). In addition, those of us who control budgets are under mounting pressure to justify every last dollar we spend. The consequence for marketing managers then is a greater need to demonstrate the return on marketing investment – and the math on this is easier with, say, direct response advertising than with an awareness generating television commercial. By focusing our marketing expenditure on the short-term and on areas in which measurement (i.e., justification) is less complicated, the danger is that the long-term value of the brands will erode.

So what do I recommend? My research found that firms will come out stronger once the recession ends if they clearly understand the contribution of brands to the long-term value of the firm. Therefore, and as best we can, marketing managers need to resist the pressure to give up a disproportionate share of the marketing budget as a way of balancing the books. In addition and when allocating marketing resources, it is important to incorporate a mix of marketing activities that will generate immediate results with marketing activities that maintain and build the long-term value of brands. And lastly, like it or not, marketing managers need to be skilled at justifying the return on marketing investment. With this in mind, the time has come to align marketing more to the goals and language of finance.

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