Cutting Your Own Throat

February 9, 2009

by Matt Michel

Advertising Age ran a fascinating article on recent bankruptcy victims.  A year or so before they went under, a number of national chains decided to cut their advertising and marketing budgets to shreds.

Bennigan’s bankruptcy made a lot of news in late 2008.  What’s less known is that Bennigan’s cut the marketing budget by 75% the year before they went bankrupt.

Bennigan’s isn’t alone.  Mervyn’s cut their ad budget by a quarter the year before they went under.  Baker’s Square cut marketing by a fifth and went bankrupt. The Sharper Image, who proved that advertising can sell IAQ products, even if the products don’t improve IAQ, cut their ad budget 82% in the two years before the company declared bankruptcy. 

Larry Light, who was the top marketing guy at McDonald’s, noted that the fast food giant tried to cut marketing in 1982, but it only made things worse.  Light boosted spending the following year and sales took off.

Light said, “It is true that some companies try to cost-reduce their way out of problems, and all that does is delay the inevitable problem.  You can't cost-manage your way into the future.”

This week I talked with Ray Isaacs, one of the country’s best contractors.  Ray operates in upstate New York, which is hardly considered “robust.”  Yet, Ray’s stepped up his marketing and is having a record year.

On the Service Roundtable, Ron Smith recently noted, “We're all aware that there is plenty of negative news regarding the current economy. No one should be surprised with a sagging economy, a downturn or a recession (whatever you wish to call it) as these just occur occasionally as do booming times. The big difference is what you do about it.”

Ron recalled the Jimmy Carter years when we tracked a “misery index” based on inflation, plus unemployment.  The prime on loans was an incredible 21%.  That wasn’t credit card interest; that was the prime rate.

Like everyone, Ron cut unnecessary expenses and laid off unproductive employees.  He refocused everyone else on sales.  Anyone not making sales was focused on generating sales leads.

But, Ron said, “The one expense I did not cut, unlike other contractors, was our marketing budget. In fact, I increased it. The result was we were profitable and even much more importantly came out of the downturn with a significantly improved share of the market.”

Dartmouth marketing professor, Kevin Keller was quoted by Ad Age saying, “As long as the economic conditions stay tough, you're going to see companies that cut back and some that will potentially pay the price.  It comes down to a very fundamental philosophical issue of advertising as an expense or an investment. If you view it as an expense, then you cut it. ... It's a big problem, because people [make cuts] without truly recognizing some of the revenue benefits.”

It’s not just revenue, it’s opportunity.  It’s the opportunity to take business from your competitors who are scaling back.  According to Ron Smith, “This is when you can take business away from your competitors. Don't join the crowd --- lead the parade, you'll be a better leader and a better company when the good times return.”

Source: Comanche Marketing. Reprinted by permission.
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Copyright © 2008 Matt Michel

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