We enter 2024 during a tricky economic situation. KPMG’s UK Economic Outlook in September 2023 painted a patchy picture, with high (but falling) inflation, high interest rates, low productivity and above all, high uncertainty.
Consumer discretionary spending is down, savings are depleted. We might not be heading for a full-on recession, but there’s no doubt we’re not out of the woods – it’s difficult for many businesses to look ahead with confidence.
So, when times are tough should we be cutting back on marketing spending? Or investing more?
We can learn a lot from past recessions.
A study by McGraw-Hill (1980-1985) tracked 600 US companies across a range of industries, with a focus on the 1981-1982 recession, a significant economic downturn in the United States. They found that those who maintained or increased their advertising expenditure during that time outperformed their counterparts who had reduced their spending.
Not just slightly outperforming them, but achieving a 256% uplift. That’s huge.
More recently, a 2022 Neilsen report examined the advertising and marketing landscape during the economic uncertainties following the COVID-19 pandemic.
The key takeaway from the study is that consistent investment in marketing can lead to significant long-term growth, even if immediate advantages are not apparent during the recession period. Neilson’s analysis confirmed that companies who reduce their marketing spend during downturns might gain short-term savings but will miss out on long-term growth opportunities.
OK, so when money is tight and the business is in danger of going under, of course the FD is going to make cuts. Survival first.
But the evidence suggests this is a poor long-term strategy.
How much should you invest in marketing?
So, let’s say you’re convinced. I’m preaching to the converted.
How do you decide how much to invest in your marketing activity? Is there a formula? Are there any rules you should be aware of?
Marketing ain’t physics.
There’s no direct causal relationship between spend and marketing success; there are no clear laws of action and reaction. There are too many other factors involved.
Of course, there are theories and opinions.
The U.S. Small Business Administration recommends that SMEs invest 7-8% of their revenue in marketing.
They suggest that this should increase with the size of the business, with mid-sized companies advised to spend around 10% and large enterprises around 15%.
And of course, this can differ by industry, and market dynamics.
The reality is there’s no specific figure you can put on it with any real confidence.
Every market is different. Every player in the market is different.
So you need to be dynamic in your approach, not rely on some benchmark figure that’s based on historical, often flawed and sometimes fabricated data.
Personally, I’m an advocate of the principles of Excess Share of Voice (ESOV). If you follow the logic that market share is impacted to some extent at least by the visibility of the brand in the market relative to the competition, then you’ll be on the right track already.
So how does ESOV work?
ESOV occurs when a brand’s Share of Voice (the percentage of a brand’s advertising within the total advertising in its category) exceeds its market share (the percentage of total sales in the category that the brand accounts for).
The ‘excess’ comes from the difference between these two figures. For instance, if a brand has a market share of 15% but a SOV of 25%, the ESOV is 10% (25% SOV = 15% market share).
A higher ESOV leads to brand growth; the more a brand is advertised compared to its competitors, the more top-of-mind it becomes for consumers, driving its market share up.
So it’s not about spending as a percentage of revenue – that’s no way to make a decision about marketing investment.
Think about it. If you’re the market leader, the chances are that your brand is better known than your competitors – there’ll be a latent awareness of the brand, which means that when you advertise, it’s reinforcement for your brand.
If you’re a new entrant to the market, you’ll have relatively low revenue and you’ve got a massive awareness job to do. You’ll need to spend a disproportionate amount to even begin to compete with the leader.
The market leader can spend less (proportionately) than its rivals, and still be spending more in real terms.
Don’t listen to the people that pluck a figure out of the air based on a benchmark. It simply doesn’t work like that.
Marketing spend must be tailored to your competitive landscape, and what you’re trying to achieve as a business.
Unfortunately, the answer to the question, “How much should I spend on marketing?” is…
It’s not even just about how much you spend.
Clearly, and (for the most part) we’d wholeheartedly advocate sustaining or increasing your advertising budget even when others are cutting back (especially during economic downturns) – because it’s likely to have a positive long-term impact.
The evidence supports this principle, particularly if you spend the money on brand building.
Think about it.
If money is tight, sales will be low no matter what you do to activate purchasing behaviour.
In a recession, or in times of economic certainty, the smart money goes on brand awareness, so that when customers are ready to buy again, you’re top of the list.
But spending more is no guarantee in itself.
You’ve got to get the message right. You’ve got to make your brand relevant. And you’ve got to deliver it consistently. Effective media planning ensures that your advertising is seen by the right audience at the right time and through the right channels.
But if your budget is limited, make sure you invest in creative that cuts through the noise. The more impactful the message, the less you’ll have to spend to achieve ESOV. If an ad is twice as memorable, in theory, you only need to spend half the money before it enters the consciousness of your target audience.
Of course, it’s not quite that simple but again, think about it.
Applying the principles to SMEs
OK, so SMEs might not have the resources for sophisticated market share and SOV analysis. That’s fair.
But SMEs can still employ the principles of ESOV to enhance their marketing effectiveness.
The key is to focus on increasing visibility and engagement using whatever tools and data that are accessible – and being agile and responsive to market feedback.
So you’re an SME marketer, what can you do?
- Even without advanced tools, SMEs can access industry reports, surveys, and publications that provide insights into market trends and competitor activities. This information can give a rough idea of your position in the market relative to competitors.
- Keep an eye on competitors’ marketing activities. This can be done through simple observation of their online presence, advertisements, social media activity, and public relations efforts. Take note of the frequency and visibility of their marketing efforts.
- Define clear marketing objectives and use basic metrics to monitor progress towards these goals. Metrics can include website traffic, lead generation, conversion rates, and social media engagement.
- Utilise digital analytics. Digital platforms offer built-in analytics that can be incredibly useful. For instance, Google Analytics, social media insights, and email marketing tools can provide data on engagement, reach, and response to your marketing efforts.
- Concentrate on increasing your brand’s visibility and engagement with your target audience. This can be achieved through consistent and creative content marketing, active social media presence, and targeted digital advertising.
- Use customer feedback and interactions as a gauge for your market presence. Regular customer surveys, feedback forms, online reviews, and direct customer interactions can provide insights into how well your brand is recognized and perceived.
- It might seem like a cop out, but you’ll need to experiment with different levels of marketing spend and observe what works best for your business. Try increasing your spend incrementally in specific areas (like digital marketing) and monitor the impact on sales and customer inquiries. An approach you might call ‘trial and error’.
In marketing (and in life) our best environment for learning is usually at the School for Hard Knocks. Try it and measure the impact with whatever tools you’ve got available. If you’re an SME, you might not have access to sophisticated tools – but what you do have is agility.
But always remember that marketing is strategic.
Marketing is not an expense.
It’s an investment in your future success.
Don’t ever turn it off.
Need to convince a reluctant Financial Director? Try using this quote from a pretty successful fella:
“A man who stops advertising to save money is like a man who stops a clock to save time.” – Henry Ford