Marketing strategy in a recession - is attack better than defence?

The classic strategic marketing response to a recession is to cut the marketing budget. But is this the best action for a firm looking to address the threats and exploit the opportunities in a downturn? In what circumstances might it be appropriate for a firm to increase marketing spending in the face of worsening market conditions and falling sales?

The intuitive response to a downturn in market demand is for a firm to cut costs. A fall of even 5-10% in revenues can have a dramatic effect on the profitability and cash flow of a business - particularly one operating with low profit margins or with a high break-even output (i.e. high fixed costs). Many industries and markets in the UK have suffered much larger falls in demand than this.

The menu of possible cost-cutting ranges from the relatively easy (training, first-class travel, Christmas parties), to the more difficult (customer service levels, sales staff) through to the dramatically painful (factory closures, business disposals). So what to do with marketing? Do short-term cuts in marketing budgets pose the risk of long-term damage or missed opportunity?

Two recent articles have challenged my thinking on this topic. Firstly, I read with great interest Geoff's report on the talk given by CEO of Air Asia Tony Fernandes last week. The essential message - invest in marketing as a positive statement of intent in a downturn. Customers will remember a business that remained positive - even during the worst of times (and there can be few industries that have suffered more than the airline industry recently). Secondly, I'm repeatedly drawn to some research I'm doing into Domino's UK - and how that business has defied the UK recession to deliver outstanding sales and profits growth. Domino's story in the UK is one of marketing investment - of grabbing the opportunity to grow market share whilst cost conditions in the advertising market have been favourable.

Looking through several research articles written in the last 12-15 months, some interesting points are made which students could usefully employ in an effective examination answer. We'll reflect these and develop them in our AQA BUSS4 toolkit which focuses on the strategic response of UK firms to the recession. However, here is a summary of the main points we've noted during our research:

There is significant evidence from previous recessions to show correlation between firms that continued to invest in marketing during a downturn and those that achieved the highest sales growth rates after the recession. Stronger students will recognise that correlation doesn't necessarily mean causation. However, the link might point to a winning marketing strategy in a downturn for a strong business (i.e. a business with competitive advantages). That strategy? Aim to build market share whilst weaker competitors are suffering or, worse, go out of business during the recession.

Student lesson number one: a recession is a great time for the best businesses to grow their market shares. A marketing strategy of building market share during a downturn should translate into much higher profits when demand returns to normal.

Maintaining or even increasing marketing spending is also a positive statement of intent by a business. Cost cutting across all the main functional areas quickly becomes top of the management agenda in a severe downturn, and this can lead to a somewhat negative culture. Managers and employees see job losses, cuts in capacity, delayed or cancelled investment projects…and they can quickly see business life as being about survival. Before you know it, the energy and optimism has been sucked out of a business. Investing in marketing (the right kind of course) has the potential to be a source of positive energy; a source of optimism.

Student lesson number two: many operating costs can be cut in a recession, but few have a more direct effect on demand that cuts in marketing. If there is less demand for competitors to share, then battle needs to be commenced for a firm to maintain or win its fair share.

Another opportunity arises from the spare capacity that a downturn generates. The significant decline in demand for television and print advertising left media companies desperate to offer more attractive advertising rates in order to fill their schedules or pages. The result? More advertising coverage could be obtained for less spend! Spare production capacity in many industries has created opportunities for firms to be more creative with their marketing mix. There has never been a better time to offer introductory deals to encourage new customers (free trials, samples, half-price offers etc).

Student lesson number three: recession = spare capacity = opportunity to be creative in customer acquisition. Recessions create an opportunity to reach and win many new customers who are looking for an alternative product or service.

All of the above isn't meant to be an argument for unlimited, uncontrolled marketing investment. Like any business investment, marketing projects need to earn an acceptable return; the advertising and other promotional budget should be subject to the same budgetary discipline as for other functional costs and activities. Marketing management should strive to maximise the effectiveness of their spending. But I'm increasingly drawn to the counter-intuitive approach that suggests attack as the best form of defence.