Three Decisions Every CMO Needs to Make During An Economic Downturn

With 2023 planning and budgeting under way, growth leaders are betting on the potential, size and impact of a recession.

Recent surveys of economists by Reuters and Bloomberg handicap the odds of a recession almost 50%. Given the mixed signals in the market, it may be a good bet. Or not. Regardless of the probability, the prospect of a recession is a huge factor in growth planning because Academic research and firm financial performance tells us that recessions impact marketers and marketing budgets as they entail a significant contraction in demand for goods and services – lowering sales, cash flow and profits for most firms. In recessions, consumers purchasing power declines, and their uncertainty about their future purchasing power increases, leading them to delay and sometimes even avoid purchasing products.

Research from the Wharton School of Business suggests CMOs need to be very considered in their budget and allocation choices in this planning cycle. Why? Because the resource allocation, investment and budget decisions they make in the coming months will have major implications to their future profits, competitiveness, and careers.

Why? While the historic response of most CMOs is to reduce budgets for advertising and new product innovation during recessions – those CMOs that had the courage, foresight and resources to increase advertising and innovation investment during recessions have historically been able to growth market share and profits. Not just for the short term, but for the long run as well. More significantly, recessions also lead to industry shakeups and realignments in the marketplace into the recovery.

These data suggest as CMOs face the prospect of an economic downturn in 2023, rather than panic and follow the herd by “hunkering down” by cutting operational and capital investments to drive growth, they should do their homework. Professor David Reibstein, Professor of Marketing at the Wharton School of business advises CMOs consider several things when setting budget and allocating growth resources for 2023:

  1. Learn from history
  2. Expect change
  3. Let firm value and financial performance be your guide
  4. Think both strategically and tactically
  5. Consider what competitors and customers in your specific industry will do differently

The first piece of advice is to learn from history.  This is important because very few CMOs have experience navigating recessions. In fact, for many CMOs, this will be their first economic downturn as a business leader. “We know a lot about marketing in recessions,” says Professor Reibstein. “They happen often. And the academic community has studied them closely.  Unfortunately most CMOs believe the best response to an economic downturn is to reduce budgets for advertising and new product innovation during recessions, despite evidence that it neither improves short- or long-term profitability.”

Recessions, or economic downturns, are narrowly defined as two consecutive quarters of negative economic growth. By this definition there have been 17 economic contractions over the past 100 years according to the National Bureau of Economic Research (NBER). Demand shrinks for a period of time – 11.75 months on average. Industries are shaken up – 17% of firms fail and more lose share, profit, and revenue leadership. Firms at the back of the pack moved up to a leadership position according to the study. Marketing budgets get cut. Product launches are delayed.

Another lesion is to expect change.  Business leaders should not expect a return to the status quo in the recovery according to Reibstein. “Every recession has winners and losers,” Reibstein continues. “Most recessions have led to a unique set structural changes in customer behavior, and as a byproduct spending patterns, industries and brand preferences.” For example, the 1990 recession gave even affluent customers permission to mix their luxury and discount buying on a product by product basis– giving rise to the “cheap chic” trend that reset and elevated the Target brand. The “Great Recession in 2008” taught customers that brands with trust, transparency, and financial stability matter in 2008. More recently, the lack of access and mobility caused by the 2019 recession has reshaped customers consumption of a wide swath of offerings – from bandwidth, home improvement, restaurants and real estate.

The facts show that recessions significantly restructure markets and only a fraction (under 10%) thrive in the following years. As an illustration, a study of 2,500 companies during the 2001 recession found a significant change in market leadership. Around 24% of firms moved from the back of the pack to a leadership position and 20% of the top firms dropped to the bottom quartile. These changes in market leadership during a recession can also have a longer lasting impact. About 80% of the previously leading companies continued to struggle even after the recession and 17% did not ultimately survive. Moreover, 70% of the firms that increased revenues or profits during the recession sustained those gains in the ensuing recovery.

Business leaders should let firm value and financial performance be their guide when making difficult budget choices. Academic research strongly indicates that investing during a recession, if you can, is a smart and valuable investment, particularly through the lens of growing profits, share and firm value. The most significant lesson to learn is that those firms that increased advertising and innovation investment during recessions grow in market share and in profits not just for the short term, but for the long run as well, according to the Markets in Motion research initiative led by Professor Reibstein. “From an objective and financial perspective, recessions are the absolute best time to invest in gaining market share, building brands and launching innovations – If you can,” advised Reibstein. “New leaders will be determined today that will persist into the future. The future of the business will be determined by how one spends in the present.”

Leaders should also think both strategically and tactically about which specific budgets and programs to adjust.“When we studied marketing behavior over the last 17 recessions, we saw an overall a decrease in marketing spending,” says David Reibstein, Professor of Marketing at Wharton who led an analysis of marketing spending in recessions entitled Markets in Motion.  “Approximately two thirds of CMOs cut back in the most recent recession for example. The other thing that we have observed looking at historic spending during economic downturns is that CMOS that had the ability and the courage to go ahead and spend during a recession were the ones that benefited the most. In the most recent recession, most CMOs looked to the downturn as a platform for accelerating commercial transformation and the fundamental reallocation of the growth investment mix.”

The bottom line is that CMOs face three fundamental choices as they allocate their resources in 2023: double down, hunker down, or capitalize on a crisis.

  1. Double down: Accelerate investment in share growth and innovation if you can.  While conventional wisdom and practical budget realities suggests cutting discretionary spending on marketing and innovation in the face of shrinking demand is the accepted course of action, historical facts suggest the return per dollar spent may never be greater than what can be gained by spending at this time. This is important for both the short-term as well as the long-term.  New leaders will be determined today that will persist into the future. The future of the business will be determined by how one spends in the present. In the last recession only 10% of  CMOs told us they would increase growth investment in the last recession.
  2. Hunker Down: Cut Non Performing Marketing Programs, Budgets and Spending. Many CMOs may not be in a position to increase spending. With a reduced and, in many cases, negative cash flow it is hard to garner internal support for spending during the downturn.  Still they should not cut indiscriminately or give every budget a uniform haircut. The decisions they make about where to cut, invest, and refocus their growth resources will disproportionately define their future profitability and competitiveness in the new buying reality. The future of the business will be determined by how one spends in the present.
  3. Don’t Waste A Crisis: Create A Burning Platform for Commercial Transformation and Reallocation. Many business leaders will use a down market as an excuse for accelerating commercial transformation and the fundamental reallocation of the growth investment mix. The argument goes, if you are going to miss your revenue and profit number, you might as well use that opportunity to change the transmission on your growth engine.  For example, 82% of CMOs viewed COVID-19 recession as an opportunity to redefine the customer experience in digital and virtual channels. Coming out of that recession, restaurants and retailers have built more e-commerce and delivery muscles, which make their revenue profile resilient, consistent and scalable.

These choices are not as black and white as they seem on the surface. Professor David Reibstein – who has educated and coached hundreds of CMOs through turbulent markets over the past 40 years – frames the choice differently given the nuances of individual markets and the relative nature of impact of marketing spend.  “Given the three options facing CMOS, I would say, do we hunker down?  Yes.” says Reibstein, who co-authored the seminal book Marketing Metrics, A Managers Guide to Measuring Marketing Performance. “But what hunkering down means is only spend where it’s efficient for you to be spending. This means marketers need to measure and understand the financial contribution of their different marketing measurements. Most struggle with determining which investments are contributing to firm value and financial performance. For example, most firms cut back on advertising while there is strong academic evidence that cutting back on advertising in a recession can hurt sales during and after the recession, without generating any substantial increases in profits.”

“Do I double down on growth and innovation?” he continues. “The answer is also yes. Because it’s the best time to double down. But not everybody can afford to do that, of course. If you can invest, that would be absolutely what you should do because building your brand during a recession is the easiest thing to do. Gaining customers. That will stay with you in the long run. That’s the most worthwhile thing for you to be doing. Even if it’s only in a specific product or market segment where the opportunity is too great to ignore.”

“It’s important for leaders to remember that most marketing expenditures have an impact on a relative basis when navigating a recession,” says Reibstein. “This means any expenditure that we make needs to be evaluated on a relative basis to our competition. So if your competition has reduced their particular spending, as most do, that might give you a window where we too could reduce our spending. Or an opportunity to gain share by spending more – because the relative effect of your spend will be far greater. If you are marketing in a competitive vacuum,  you’re going to have a much greater relative impact, much greater relative presence, able to capture customers that are going to be with you even after the downturn.”

“The third option is don’t waste a crisis and let an opportunity pass you by,” Reibstein continues. “You cannot ignore the opportunity to disrupt and transform markets either. We’ve had numerous recessions and we should be learning from them. Specifically, we should learn about how much they disrupt the status quo of markets, and how big the opportunity is to transform and disrupt the competitive balance during those times. Even in specific segments or adjacencies.”

Finally, context is critical.It essential that you consider what competitors and customers in your specific industry will do differently. To strike the right balance between investing, cutting and transforming, CMOS should be careful to do their homework and answer these questions:

  • How will your specific customers, industry, and competitors behave during the downturn? Marketing teams should do research to determine to what degree their specific customers be hurt by energy, supply chain, or inflation more or less than others. And how they will rebalance their spending. It’s also critical to figure out whether  your competitors are going to cut back on ad spending and new product launches. What customer behavior trends will be impacted, exacerbated or emerge?
  • Will the changes benefit, harm or disrupt your industry? Is your industry ripe for disruption? Most Private Equity owners and growth oriented CEOs tell their investors this is the case.  It’s hard to image a SaaS CEO saying otherwise. This is a relevant question for every CMO because recessions significantly restructure markets and only a fraction (under 10%) thrive in the following years. Many of the changes in customer behavior, sales force engagement, and general business models are not temporary. Does your business have the opportunity to become the Target of 1990 or the Zoom of 2019?
  • How will the sales response function change within your customer base? Every growth plan is fundamentally based on implicit or explicit assumptions about the sales response function. The sales response function is a curve that plots the stimulus and response relationship between advertising, marketing, and sales investments and actions and the resulting revenue.  Contribution to profits and the business objectives can easily be calculated from that.    That curve changes dramatically during a recession as there is less competitive activity and advertising in the marketplace, and customers shift their buying practices, budgets and priorities. In many cases, the curve gets steeper meaning it takes less marketing effort to generate incremental sales. The question every CMO needs to answer when planning for 2023 is how will the sales response curve change within our specific customer base and competitive set?

You can learn more about how marketers have adapted their go to market plans in the face of a recession by exploring our Markets in Motion research which includes a thorough assessment of academic research on marketing performance during recessions, and interviews with current CMOs on how they adapted to the most recent recession.

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