Back in 1990 Stephen King, who passed away in 2006, published a pioneering study on advertising spend during a downturn. His conclusion: that businesses which cut advertising would be long-term losers

Why advertising pays in a recession

Photo of Stephen KingKING STARTED out by defining a recession in a specific market as a time when short-term growth lags the long-term trend by at least four percentage points. With this definition in hand, he looked at data from some 749 companies in the Profit Impact of Market Strategy (PIMS) database, provided by the Strategic Planning Institute, covering four years or more for each company.

The first conclusion was the predictable one that companies increase their Return on Investment (ROI) when the market expands, while their profits fall when the market contracts.

During recession, the data showed that only a third of companies cut their advertising spend - by an average 11 per cent - while two thirds increased it; Around 60 per cent of those increasing spending did so modestly, by an average 10 per cent; the remaining 40 per cent made a big increase, average 49 per cent. All the businesses saw a reduction in their ROI during the recession, albeit it was slightly greater (-2.7 per cent) for the big spenders, than for those who cut their advertising (-1.6 per cent). This caused King to note: "...businesses yielding to the natural inclination to cut spending in an effort to increase profits in a recession find that it doesn't work."

"Businesses that cut their advertising expenditures in a recessionary period lose no less in terms of profitability than those who actually increase spending by 10 per cent"
However, when he looked at market share, King found that marketers who cut their spending lost an average of 0.1 per cent of the total market, while those that made a significant increase in advertising spend saw their market share rise by an average of 0.5 per cent of the market. And the implication of this is that their profits would be greater in future.

King summed up these findings as follows: "In general, virtually all businesses see reduced profits when their market is in recession. But businesses that cut their advertising expenditures in a recessionary period lose no less in terms of profitability than those who actually increase spending by an average of 10 per cent.

In other words, cutting advertising spend to increase short term profits doesn't seem to work. More importantly, the data also reveal that such a moderate increase in advertising in a soft market can improve share. There is a substantial body of evidence showing that a larger market share generally leads to higher return on investment.

For the aggressive marketer, the data suggests that a more ambitious increase in expenditure, although reducing profit short term, can take advantage of the opportunity afforded by a recession to increase market share even further.

The PIMS data indicate that consumer marketers increasing their spending by an average of 48 per cent win virtually double the share gains of those who increase their expenditures more modestly. While this aggressive increase in advertising is associated with a drop in ROI of 2.7 per cent in the short-term, it may nevertheless be acceptable to the marketer looking ahead to post-recession growth."

Options and Opportunities for Consumer Businesses: Advertising During a Recession, by Alexander L. Biel and Stephen King. The Center for Research & Development 1990.

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