When an economy slows down, companies look for ways to maintain their profitability, which include cost-cutting measures. Later, as the economy begins recovering from the slump there is no guarantee that sales will increase across the board. Some brands will actually remain at low levels while others will grow dramatically. The outcome shall be determined by what you have been doing with your marketing budget during the hard times.

 

Historical evidence suggests that it is usually a mistake to cut marketing budgets during a slump. One such example is the decision made by Kellogg’s during the U.S Great Depression to maintain its marketing budget, while Post the market leader at the time, chose to cut back their budget. This resulted in Kellogg’s taking over market leadership after the Depression. This is because when times are better consumers tend to trust and fall back on brands that were talking to them, and essentially relegate silent brands to second place.

 

A study of 600 companies from 1980 to 1985, by a Mc Graw-Hill on the 1980-1981 US recession, concluded that there was a positive correlation between marketing spend and sales growth over the 5 years. In fact, there was an average sales growth of 275% for those who increased spend, against 19% for those who cut back.

 

Another study by Densu Inc on 874 publicly-listed companies, during the 1985-1986 Japanese recession concluded that there was a positive correlation between increased marketing spend and growth in sales, market share and operating profits. Furthermore, there was also long-term leadership sustained after the recession by those that spent

 

Consumers may downgrade to lower cost products during hard times, however, they do not do so because they dislike your brand, they just cannot afford the cash outlay anymore and therefore look for a stop gap. If you continue communicating they shall keep your brand in mind and when their financial status improves your brand shall be the pre-eminent choice. If you do not, your consumers will drift away from your brand and form new habits and loyalties while they are away.

 

Some companies also tend to work on the assumption that their low-quality competitors shall remain the same when the economy improves, such that the wayward consumers shall regain their senses and come rushing back to their previously favourite higher quality brand. The strategy here is, to “sit it out” and in the meantime cut all unnecessary expenses, including marketing. However, more likely than not the cheaper competition has been studying the high-quality brands and has a quality upgrade strategy up his sleeve.

 

Article by Richard Mukoma, Managing Partner