Advertising in a Downturn

The London-based Institute of Practitioners in Advertising (IPA) published a PDF titled Advertising in a Downturn: A Report of key findings from an IPA seminar (March 2008).

The report summarizes the presentations of four presenters.

Peter Walshe, Milward Brown

« Walshe presented data showing a strong correlation between market share and the level of ‘bonding’ – an aggregate measure of multiple brand-consumer relationship metrics. The clear implication being that if budget cutting results in a decline in ‘bonding’ then market share can be expected to decline »

« Further data was presented showing a strong relationship between the level of risk of loss of share and the key expenditure metric: share of voice (SOV) minus share of market (SOM), where share of voice is defined as a brand’s share of total category communications expenditure »

« Thus brands that cut their budget relative to competitors are at greater risk of share loss. »

« It was observed that the level of risk was greater in some categories than others. Brands in categories that are more price-driven and where brands carry less importance to consumer choice (such as motor fuel, mineral water and apparel) are more susceptible to share loss when cutting budgets. Conversely, brands in categories where the reverse is true (such as luxury cars, financial services and fragrances) tend to be more resilient. »

Karl Weaver, Data2Decisons

« A typical brand case study was shown where the long-term element of payback was over four times greater than the short-term. The importance of this is considerable. Following a budget cut, 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 will result in a dangerously misleading increase in short-term profitability. The longer-term business harm will be more considerable, but will not be noticed at first. »

« The long-term effects of two different budget-cutting scenarios were modelled for the brand. In the first scenario the budget was cut to zero for just one year and then returned to usual levels. In the second scenario the budget was halved for one year and then returned to usual levels. Sales recovery to pre-cut levels took five and three years respectively »

« Other dangers of common downturn behaviours were also identified. The diversion of communications expenditure into price promotions is a common response to downturn. The experience of widespread use of price promotions in the US automotive category illustrates how consumers quickly come to expect ‘incentives’. They therefore lose their efficiency as a generator of incremental sales and end up as a loss of profitability »

« Another widely overlooked impact of reduced brand communications expenditure is on price elasticity. Data was presented for a campaign that had reduced the price elasticity of the brand (i.e. the percentage change in volume for a one percent change in price) from -2.2 to -1.5. Such improvements often account for the majority of the profit impact of a successful campaign. By extension, the abandonment of communications is likely to result in the gradual increase in price elasticity and the growing need to reduce pricing to maintain volume. This may have a very damaging effect on profitability, but again one that is deceptively time-lagged. »

Keith Roberts, Malik PIMS (Profit Impact of Marketing Strategy)

« Essentially downturns provide a window of opportunity for cheap market share gain to brands that increase investment. »

Peter Field, IPA dataMINE

« An approximate rule-of-thumb finding was extracted from the analysis: that for every 10 points that SOV exceeds SOM a brand can expect to gain one point of market share per annum. The corollary of this is that a brand can expect to lose one point of market share for every ten points it allows its SOV to fall below its SOM. »

« Attention was drawn to the deceptive short-term improvement due to the lagged effects of marketing on sales (recent authoritative PricewaterhouseCoopers research suggests that 45% of the return on television expenditure comes through more than one year later). This short-term improvement usually provides the stimulus for such severe budget cutting and for a time masks the considerable damage being done to longer-term profitability.  »