Spend more, less or the same on media in the next recession?
After years of low inflation and negative interest rates economies in Europe, the US and elsewhere have inflation rates now reaching double digits. Businesses and consumers are reminded of the economically difficult late 1970s and central banks are facing a very tough trade-off between controlling inflation and economic growth. Most economists and signals from central banks around the world indicate that interest rates will go up, bringing down excessive inflation and triggering a recession.
There are several potential benefits for companies that advertise in a recession. Some competitors will reduce advertising, so those who do advertise will increase share of spend and budgets will stretch further because media costs are likely to go down in a recession. Maintaining spend can also help strengthen the brand and benefit the business long after the economy has recovered.
However, we believe the decision about how much to spend is not that straightforward for all businesses. Companies should make the best use of data to make their decision, but it will be especially important for those that have to make hard choices.
How will a business fare in the next recession?
Considerations for a CFO assessing budget cuts will include expectations of how the recession will impact the business, whether the business needs to choose between media and other investments and what the returns from media investment will be.
Not all businesses will become the next AirBnB, which started during a recession, but some companies will benefit from an economic downturn. Tesco recently reported consumers are already switching to cheaper product ranges because of the inflationary pressure. In a recession this trend is likely to continue. The recession can boost sales and make advertising more effective than before for some brands. If there are no financial restrictions, the case for advertising is fairly straight forward.
If sales are going to drop during the downturn, a business might still have the financial resources to spend on advertising to build the brand and generate sales through media. However, they will want to know how much to spend and when their media investment pays back compared to other investment options.
For a company going into a recession during a cost-of-living crisis, advertising might compete with funding a price reduction, which could help to increase the customer base. Ideally the business communicates the price cut in an ad to consumers, but managers will want to understand the returns from the change in pricing and media investment and which media work best to do the job.
“If a business needs to make hard choices between media and other investments, then showing the likely benefit from continuing to advertise becomes even more critical.”
For companies likely to lose customers and with limited financial reserves, the same holds but media budgets will be under even greater scrutiny. The financial risks are greatest here and companies should use all available data for their decisions.
So, what does this mean for media spend?
There are good arguments to spend especially if a business doesn’t need to make trade-offs, but all firms will benefit from more informed choices. Measurement helps to understand how well media did in the past and scenario planning can show likely outcomes for media driven revenue in the recession.
Performance Media
Channels focused on delivering sales quickly can help a business get through difficult phases in a recession. Performance media also come with the advantage of easily available measurement through last click data. Businesses will use this data to justify budgets.
Ideally a business will also have a marketing mix model in place, providing a more realistic view of performance media. Last click data does not take into account all the other factors that drive sales and attributes everything to the last digital touchpoint. A business selling air conditioning systems may see a lot of AC orders from brand search, but they might have been driven by the heatwave that took place and the massive TV campaign that happened at the same time. This is especially true for harvesting channels, such as Brand PPC or affiliates.
Last click data typically over-estimates the total level of sales from performance media, but also the relative impact of performance channels. Marketing Mix Models can be used to adjust last click data. In the absence of this, last click data can be a guide for relative performance but should be used with caution. Whatever data is available should be leveraged in a scenario planning tool or media optimiser to support quarterly or annual investment decisions.
Brand Media
There is definitely an opportunity for those who can spend on brand media in a recession and have a good understanding of its likely performance. However, uncertainty about returns will usually be higher than for performance media and we would be weary of making unconditional recommendations to invest in brand media during a recession.
Several studies suggest brand media do work in the long run. We model the long-term effect of media for our clients and most of the time we can identify and quantify such an effect, but that’s not always the case for all brand media channels. We find a significant amount of variation in the effectiveness of brand media, so it is important to know how much to spend on let’s say TV, radio and Out of Home. All are brand media, but their returns can vary greatly.
Probably the most important caveat is that brand media typically work over a longer time and a business will want to know when it benefits from brand media. If the benefits of brand media during the recession are modest, but have a stronger impact later, then a business should be able to have a good estimate of the returns over time.
Measurement and scenario planning help manage investment risks during the recession
Spending money on advertising during the recession may be a fairly straightforward decision for some companies, but for many businesses it will be a trickier decision with several unknowns. Businesses can use the measurement data they already have to reduce risks. This will often be last click data for performance media. Marketing mix models or experiments will provide a more realistic view of performance media ROIs and brand media returns.
In the absence of marketing mix models or experimental data, we have been working successfully with clients to combine their last click data with benchmark media performance data as a starting point for the next crucial step, running investment scenarios to understand future returns of media. This measurement data should be used as the basis for scenario planning and optimisation exercises, accounting for likely changes in a recessionary environment and to help understand how to get the most from media investment at the right time, when the business needs the returns. This way a business can see how much it is likely to get back from the media investment, which channels it should spend more or less on and when the returns from media come in.
In times of uncertainty, organisations that are already armed with a strong sense of how, when and where advertising works for them will be best placed to steal a march on competitors