Why CMOs Need to Consider Investing in Growth During This Recession
Growth leaders are in the midst of a unique pandemic induced recession. For many it is their first as a business leader. The decisions they make during this recession have major and immediate implications to their future profits, competitiveness, and careers.
Economic downturns are not rare occurrences. There have been 17 economic contractions over the past 100 years according to the National Bureau of Economic Research (NBER). Given the regularity of these economic downturns, we should have plenty of opportunity to learn from history. In particular, what did companies do to manage through previous crises, what worked and what did not.
The Wharton Business School recently conducted in in depth analysis to help CMOs learn from the past and make the best possible decisions about where, how, and when to invest in the current recession to maximize firm revenues, profits, and share. A team of experts from the Wharton Business School examined how business leaders should adapt to the current recession in the context of history, known academic research, and a survey of 352 CMOs to understand the actions growth leaders are taking today in the wake of the Covid-19 recession.
Our analysis highlights (a) aspects of firms’ behavior that are similar to those in previous recessions and (b) unique elements of market dynamics brought about by the pandemic. The analysis gives clear guidance on what growth leaders need to be doing during the recession in order to thrive in the post-pandemic environment.
Some facts are consistent across recessions.
- Demand shrinks for a period of time – 11.75 months on average.
- Managers reduce budgets for advertising and new product innovation during recessions, despite evidence that it neither improves short- or long-term profitability.
- Recessions lead to industry shakeups and realignments in the marketplace into the recovery. During an economic downturn, an average of 17% of firms fail and more lose share, profit, and revenue leadership. 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.
The most significant finding 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.
Our survey of CMOS revealed that in some ways this recession is no different. 98% of the CMOs we surveyed feel the current recession will impact them significantly. For about 14 months. 70% of businesses expect revenues to fall. Half of CMOs anticipate revenue declines of between 10% and 100%. One third of the CMOs believe the changes in how they go to the market brought on by the current recession will be permanent.
Some aspects of the current pandemic induced recession are new and unique.
- Revenue plans suffer from both a lack of demand and access to demand that exists. Unlike other recessions, the lack of access to customers and markets plays a much bigger role in the current pandemic. This lack of access was cited as the #2 risk factor to the business overall. “Closing enough business in physical (retail, face to face sales, and events) channels” is regarded as the biggest risk to the revenue plan by 41% of CMOs. Three-quarters of CMOs report that changes to attendance at events and conferences are negatively impacting their sales and marketing effectiveness and competitive positioning in the market.
- The pandemic is forcing businesses to accelerate the transformation of their selling channels to a digital and virtual commercial model. Digital channels and media are a bigger factor in how the contraction is impacting different businesses. And most CMOs see opportunity in building virtual channels and delivering digital experiences to remote customers to exploit remote customers. And an overwhelming 82% of CMOs believe their response to the COVID-19 epidemic change provides them the opportunity to redefine the customer experience in digital and virtual channels.
The pressure to gain access to markets and adapt to work at home/stay at home customers is shaping the response of most CMOs to the recession. The vast majority of CMOs in the survey reported pressure to develop virtual selling channels as a priority in their current and future investment strategy. Most CMOs view the changing use of Direct to Consumer channels for both consumer and b2b businesses, time spent on mobile devices and the receptivity of buyers to direct and virtual selling as very positive to their revenue prospects in the longer term. These beliefs are reflected in their desire to increase spending on new direct to customer channels and digital technologies to improve sales coverage while at the same time decrease spending on face to face sales and events.
The analysis has two clear recommendations to business leaders:
- Increase investing in marketing and innovation during the recession if you can. While conventional wisdom and current management behavior suggests cutting discretionary spending on marketing and innovation in the face of shrinking demand is the accepted course of action, historical facts suggest otherwise. At a time when 66% of businesses have cut spending on marketing and innovation, there is no evidence cutting spending in a recession improved profits, growth or share in the short or long term. In fact, our analysis strongly indicates that investing during a recession is a smart and valuable investment , particularly through the lens of growing profits, share and firm value. Yet, 10% of today’s CMOs told us they plan to increase growth investment during the recession.
- Or anticipate and prepare for significant changes if you cannot. Another lesson is that business leaders should not expect a return to the status quo in the recovery. The facts show that 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, but may lead to a fundamental change in behavior. A third of CMOs believe their go-to-market model will change forever as a direct result of this recession. It is best to be out in front of this business transformation than lagging behind.
Marketing leaders have limited time or resources to make the difficult resource allocation and investment decisions they must make in the coming year. With planning for the 2021 fiscal year just months away, the vast majority (98%) of organizations currently do not plan to commit additional funds to make these changes. At the same time, the decisions they make on where to cut, invest, and refocus their growth resources will disproportionately define their future profitability and competitiveness in the new buying reality. With a reduced and, in many cases, negative cash flow it is hard to garner internal support for spending during the downturn.
That said, the historical evidence is clear, 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.
You can learn more about this research, and importance of making investment decisions during the recession by reading the full Marketing in Motion report at the Revenue Enablement Institute.