A business person views a red line dropping completely off the chart

Reducing expenses in a recession: is it better to cut advertising or lay off workers?

The United States’ gross domestic product (GDP) was negative for two straight quarters. Many people would call that a recession.

The National Federation of Independent Business (NFIB) Small Business Optimism Index dropped to 89.5 in June 2022. The NFIB survey revealed that business owners’ expectations over the next six months hit their lowest level recorded in the 48-year survey.

The textbook response of small businesses in the face of a recession is to cut costs to match their drop in revenue. The two most popular tools to cut costs are worker layoffs and slashing adverting expenses. During most other recessions, this column might dedicate more time to helping businesses most effectively right-size their organizations. However, according to the NFIB survey, 50 percent of owners report that they cannot fill job openings. Cutting labor to reduce costs is not an option for many companies. That makes reducing advertising costs a more palatable solution.

Many small businesses are already cutting back on advertising. Companies like Meta (formerly Facebook), Snap and Twitter derive much revenue from small U.S. businesses. Each of those companies is reporting lower advertising revenue and offering shaky guidance for the coming quarters.

Alyssa, who sells her jewelry in boutiques found in Berkshire County towns like Lenox, Williamstown and Great Barrington, makes 80 percent of her sales through Instagram advertising. With sales slipping in recent months, she has reduced her digital advertising budget for the remainder of the year. Karl, who uses more traditional advertising to promote his Belchertown roofing business, has canceled his billboard campaign, which was slated to run into 2023.

I suggest that you think differently from Alyssa and Karl. Containing costs is smart, but you don’t want to sacrifice your long-term growth. According to marketing firm MiQ, companies that continued to advertise during the prolonged recession of the 1980s saw 256 percent higher sales than their counterparts. Those who chose not to advertise during the contraction experienced no increase in market share and a mere 18 percent rise in sales once the economy picked up.

Prioritize spending

Consider changing the mix of advertising but not necessarily the amount. But, yes, cut some of that spending. There is a saying in the industry, “a third of my advertising works; I just don’t know which third.” You may be considering cutting costs because demand is down. That means worker capacity is up. Use that time to determine what advertising is working and what is not.

Sheila owns a furniture chain based out of Albany, N.Y. She uses Salesforce, the customer relationship management software, to track her customers and opportunities. Her floor salespersons input names, addresses, and keywords that are associated with the reasons why the customer entered the store. Did they see an advertisement? Go to the golf tournament Sheila sponsored? Get referred by a real estate agent? (For the customer’s digital journey, that path is tracked by an outsourced provider who can determine the route customers took to arrive at Sheila’s website and then the store).

Sheila is one of the 50 percent of the NFIB survey respondents that believes the next six months will be challenging for the economy. Previously, she had been reluctant to drop spending in areas that were not driving as many clients to her. Sheila didn’t want to miss those sales, even if the acquisition costs were relatively higher.

Now she is dropping those weaker advertising spots. She cut 16 percent of her advertising budget, accounting for 3 percent of her sales. Sheila will cut her costs, for the time being, then raise her budget again when the Federal Reserve stops raising rates. Her marketing research has allowed her to know where to spend the money when it’s time to get back to it.

Other ways to reduce advertising costs include creating the ads in-house and negotiating with the organization selling you those ads. With ad revenue decreasing, you could pressure the seller to design ads instead of a costlier marketing agency. Additionally, marketing agencies charge a roughly 10 percent premium to place ads for you; you don’t need to outsource that job.

Your vendors may have unused marketing dollars designated for customers. A vendor will sometimes keep your business by promoting you.

Although companies are loath to lay off employees, you might consider releasing your social media person. It’s a nice-to-have, but how many customers have you gotten because of that rad video you posted on TikTok?

Spend more on what works

Many companies do not have a marketing team (or person) that understands analytics. I know that the saying is “spend money to make money,” but you might want to consider hiring a fractional chief marketing officer to save money, and then make money. A fractional CMO can help you refine your advertising budget through the recession; then put you on track for a long-term strategy.

A fractional CMO can offer value in the best of times, but that’s not today’s conversation. During a recession, you want data and discipline. It would help if you determined what you should have cut a year ago sans recession. You may need to be held accountable to allocate ad spending to less risky and more profitable areas. Also, a fractional CMO can help you understand that the form of marketing you were using won’t necessarily work during an economic slump.

During recessions, consumers set stricter spending priorities. It makes sense to cut the spending on the advertising you were using, but it’s short-sighted to not adapt to consumer preferences and needs. As John Quelch and Katherine Jocz put it in “How to Market in a Downturn,” “Companies that put customer needs under the microscope take a scalpel rather than a cleaver to the marketing budget, and nimbly adjust strategies, tactics, and product offerings in response to shifting demand are more likely to flourish both during and after a recession.”

Hiring a fractional CMO is a short-term cost and a long-term investment. Maintaining your marketing allows you to be involved with messaging your community when the recession ends and your customers start buying again.

 

This article first appeared in the Berkshire Eagle on August 13, 2022.