SHOULD COMPANIES ADVERTISE DURING AN ECONOMIC SLOWDOWN?

The other day there was an article on the front page of AdAge, which talked about 10 things we could learn from the ‘70s recession. What we discovered, is that much of what was being reported by the media back then sounded a lot like what is being said today. Stock watchers and economist draw comparisons between then and now, and their conclusion is that we are entering a prolonged slowdown in the economy like the 1970s.

 

So as a self-proclaimed “gurus” in the field we took it upon ourselves to dig deep on the subject to be in a better position to advise our clients.

 

First, are we in a recession? Yes we are. We just had 10 straight months of job losses. That alone is a clear sign that we’re in tough economic times. However, economist are now saying that the worse is over and we’re going to start seeing the light at the end of the tunnel soon. So what should you do as an advertiser to reduce the pain?

 

We looked at past recessions and there seems to be two schools of thought. A good number of companies believe in boosting their advertising during recessions. Their argument is that by doing so, they increase sales, market share and profitability. In addition, they believe that by maintaining a strong presence they will come out ahead once the recession is over.

 

However, it is a hard decision for any manager to increase the advertising budget while they watch consumer confidence and spending drop, which is why there is also another side of the story.

 

Who is right?

 

Studies on the subject by the American Business Press conclude that increasing spending on advertising during a recession leads to benefits that exceed the benefit of increasing advertising during non-recessionary times. Secondly, boosting advertising during a recession reduces the long-term damage to a brand once the recession is over. However, the effect varies by industry and the effectiveness of the advertising messages plays an important role in whether the efforts will be successful or not.

 

The key is to treat advertising like an investment, with payoff in the form of increased earnings and market value. The problem lies in that valuation of intangible assets such as advertising. In the United States, such expenditures are expensed as incurred, a practice that is clearly at odds with managers’ expectations for their contribution to future sales.

 

Intuition suggests that increased advertising produces positive results, but this applies only if advertising strategies are effectively implemented. However, poor executional elements such as unproductive messages, bad media choices, or poor message timing may work against the value-adding potential of advertising.

 

In summary, overall current-year recessionary increases in advertising create added value that extends through the year following a recession. Conversely, the study finds little evidence that decreases in advertising spending have incremental effects for current or future earnings. Similarly, on average, neither increases nor decreases in advertising during recessions have effects beyond two years following a recession.

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