The Importance of Continuity in 'Discretionary Spending' - Client Briefing
There are umpteen pathways an organisation may take when deciding on how best to react to a contractionary phase of the business cycle. Forethought has measured the effect on clients that have ceased programmes only to recommence them in an expansionary phase. We thought at this challenging time you might appreciate us sharing such insight.
Communicate now!
When the economic climate is in a contractionary phase, organisations are inclined to cut spending that is deemed discretional in nature. Marketing activities such as media spend, research and product development are often the first items to be cut. One study recently published in the Australian Financial Review (December 2008) reported demand in these areas was falling with the weaker economic market and predicted a sharp contraction in media spending during 2009 – the first predicted decrease in this longitudinal study since 1985.
Surely, such a decrease in advertising provides an opportunity to gain a greater share of voice and speaks to the ideal of acting counter-cyclically in such times. It also reminds us of the need to periodically review our positioning and brand communications.
A proposition around security such as that used so effectively by AustralianSuper (then Superannuation Trust of Australia) arising from the last contractionary phase was not about acquisition, but rather a subtle yet timely reassurance for existing members. Campaign imagery was used to evoke a sense of mutuality, strength in numbers and trust that subsequent brand tracking found to be highly effective in reassuring members.
In another brand project undertaken at the height of an expansionary phase for Macquarie Bank, the chosen proposition was based on the driver ‘a constant stream of new product ideas not available elsewhere’ (Forward Thinking). Surely such a proposition is now inconsistent with the sharp profit downgrade announced recently and indeed, the number of underperforming ‘innovative’ products.
Whilst there are opportunities for those who take action, it can be argued that the risks of inaction hold more drastic outcomes for the organisation. A popular Spanish proverb warns that ‘through not spending enough, we spend too much’. Yet in a period of economic downturn, organisations so often focus on reducing financial spend to aid the bottom line, ignoring what is being ‘spent’ in terms of deteriorating goodwill.
Seasonal research studies by Forethought have shown downtime between promotional bursts has a detrimental impact on the goodwill attributed to the brand. These studies have identified a constant flux in goodwill scores from potential customers, with highs built during periods of marketing spend and considerable decay occurring when spending was halted. Subsequent marketing efforts served only to rebuild goodwill to previous highs, before another spending break triggered decay once more. This highlights the risk of reducing marketing spend and thus undermining past marketing investment, for a temporary but illusionary boost to the bottom line.
What gets measured…
Then there are the dangers associated with reducing current market visibility through a suspension of marketing research spend. This is demonstrated in a recent Forethought case study of a large Australian organisation that suspended its customer engagement marketing research spend for 18 months, after multiple years of biannual tracking. The exhibit below shows the staggering 13.8% reduction in customer intentions to remain with the organisation and the 9.1% reduction in advocacy, particularly amongst previously strong advocates of the brand. The net promoter score fell from +5.1 to -15.8.
When the decay of intentions filtered through to behaviour, the programme was reinstated. However, by this time the cultural focus on customers had been substantially diminished, seemingly forevermore.
These figures were heightened by a significant drop in customer satisfaction over the 18-month period, as illustrated on the following page. As Sam Walton, the founder of Wal-Mart, once said, ‘the market is the only force that can fire everybody in an organisation from the chairman down.’ The medium- to long-term cost of reducing market spend in the interests of the short-term bottom line cannot be underestimated.
And then finally, there is the academic literature
The true impact of budgetary cuts during times of recession may not be seen until the long term. This is because the residual effects of previous marketing activities can provide a misleading indicator of long-term impact.
The PIMS (Profit Impact of Marketing Strategy) assessment conducted in 1998 found organisations that increased marketing spend during the last recession achieved an average return on capital employed of 4.3%, compared to 0.6% for those that maintained marketing spend and -0.8% for those that cut marketing spend.
Footnote
Of course, market realities sometimes demand that ‘discretionary spending’ is cut and Forethought will always be ready to respond to whatever instructions we are given. However, we also believe it is important to point out the opportunities and consequences that we have observed.
