Should You Cost Cut Your Way Through A Recession?
Should you cost cut your way through a recession or invest in your business to grow tomorrow? Which is the most successful approach, and what’s the evidence that supports why one approach is better than the other?
This is the second in a 5-part series to help female founders lead their business confidently through the coming economic recession. In Part 1, I explained what a recession is and explored why businesses owned by women or people of colour fared better following the Great Recession of 2007-09. This article explores why companies that lead their way through a recession emerge stronger.
But first, in case you’re new to my blog, a very warm welcome and quick introduction. I’m Denyse a former CEO turned Business Consultant. I have a deep knowledge of what’s involved in growing and scaling businesses, having led teams of 150+ people and been responsible for overseeing multimillion-pound budgets, multiple workplaces and complex change management projects.
I led that company through the 2008 economic recession and was able to deliver winning results. It wasn’t easy, but I was fortunate to work with an Executive Coach who helped me to develop the skills I needed to succeed, and I had leadership training from Cranfield School of Management to guide me.
As I formulated our strategic plan to navigate the economic crisis, I noticed that the CEOs in my network took one of two approaches. They either managed their way out of it or led their way out of it:
In the first approach - where CEOs managed their way through the crisis - they typically reacted to the market conditions by making widespread cuts in an effort to maintain short-term profitability targets. These CEOs typically cut their marketing budgets leaving sales to do the heavy lifting.
In the approach where CEOs led their way out of the crisis, they intensified their company’s focus on the long-term purpose of the firm and made targeted cuts in areas that were not core to that purpose. These companies typically invested in strengthening their brand and made strategic decisions about marketing. Once the recession lifted, these firms were set for a quick shift into growth mode.
I instinctively took the second approach because I was convinced that if we cut too deeply, we simply wouldn’t have the capacity to grow again. It turned out that my instincts were correct. Companies which master the delicate balance between cost-cutting to survive today’s crisis and investment to grow tomorrow typically do better after a downturn.
This is because (a) companies which slash their marketing in a downturn leave empty space in their customers’ minds for the companies which do market strongly and (b) it costs those companies which cut deeply into marketing and communications in a down period more to regain their share once the economy turns around - upwards of four or five times as much as the cuts saved.
Not convinced? Here’s the evidence in support of investing in your business to grow tomorrow.
The Evidence In Support of Investing to Grow Tomorrow
Let’s look first at the 1980s recession. The most frequently cited research comes from a study by McGraw-Hill which analysed 600 B2B companies in 16 different sectors from 1980 to 1985. It found that those businesses which chose to maintain or raise their level of advertising expenditures during the 1981 and 1982 recession had significantly higher sales after the economy recovered. Specifically, companies that advertised aggressively during the recession had sales 256% higher than those that did not continue to advertise.
Credit: McGraw-Hill Research. Laboratory of Advertising Performance Report 5262, 1986
Now let’s look at the 2008 the Institute of Practitioners in Advertising and Marketing (IPA) analysis of how different companies handled marketing and advertising during a recession. They invited independent experts from different companies to provide insight and analysis. One of these, Data2Decisions, detailed the long-term impact of cutting or halving marketing and innovation spend.
After cuts, a brand will continue to benefit from the marketing investment made over the previous few years. This will mitigate any short-term business effects and can result in a misleading increase in short-term profitability which can be dangerous. The longer-term business harm will be more considerable, but the damage may not be noticeable at first.
Finally, the Profit Impact of Market Strategies (PIMS) provides more data-based evidence. This comprehensive, long-term study was set up in the 1960s and continues to collect data on the performance of strategic business units in all major industries.
PIMS has analysed data collected from around 1,000 business units in developed economies during periods of market downturn and subsequent market recovery. Their data is extremely robust, highly respected, and enables a comparison of downturns over time. Analysis of the winning business strategies deployed during earlier downturns concluded with the advice to increase marketing, R&D and new product spend. This advice applies to both SMEs and larger companies.
Still need some convincing?
Let’s rewind a hundred years to the 1920s, when the consumer brand Post led the ready-to-eat cereal category. In response to the recession, Post cut its marketing budget significantly while its rival Kellogg’s doubled its marketing spend, investing heavily in radio and introducing a new cereal sub-brand called Rice Krispies, with its iconic cartoon mascots, Snap, Crackle and Pop. Kellogg’s profits grew by 30% and the company became the category leader, a position it has maintained for almost a century.
When times get tough, bold action like Kellogg’s took should be the default reaction to future-proof your business. This is the moment to double down on your marketing, not to go dark. Not only does this improve the customer experience, but it also grows brand equity and increases market share, potentially positioning your business as the go-to company for your products or services.
In Summary
Your brand is for life while recessions come and go. Don’t go dark because your customers need you just as much as you need them. Invest in your business to grow tomorrow and lead your way through this cost-of-living crisis.
Whatever circumstances you find your business in, know that you’re not alone – and that I’m here to support you. An experienced and empathetic business advisor can make a massive difference to your business – as well as to your own sanity – so do consider getting in touch to book a friendly (and free) chat at any time. I’m always happy to talk you through how I could help. For examples of my work, check out my portfolio of case studies.