Brand Preview 2023: How can you compete?

In a recession customers stop spending. Don’t they? Well, some do - there’s already evidence of that - but others will continue to spend. So, how do you compete and make sure they keep spending with you? Maintaining your marketing activity is a good start.

But marketing budgets are often the first to be cut, as nervous finance directors and CEOs look for options to reduce costs. Advertising spend in the UK is forecast to drop 3% this year (once inflation is taken into account). The impact was even more severe in 2020. As the pandemic hit and the UK went into lockdown, investment in advertising dropped by 12% in the first 6 months of the year.

Cutting the marketing budget does save money. But it is a short-sighted solution, that only offers a short-term benefit. However, it does have long-term consequences. If you reduce your marketing spend, you will find it harder to regain sales and revenue as the economy recovers. There is a century of data that demonstrates this, stretching back to the 1920s and the Great Depression.

Every recession reveals the same outcome. If you stop marketing, your sales drop. On average, that fall will be 16% after 12 months. In 2020 Coca-Cola, “paused” its global advertising activity during the worst of the pandemic, cutting advertising spend by 35%. By the end of the year Coca-Cola’s revenue fell 11%. By contrast, rival PepsiCo maintained their spend and saw revenue growth of 5%.

Research has shown that the negative impact of stopping advertising is more immediate for small companies. Medium-size companies experience a slower decline for the first two years, before a steep fall. But large companies are even more durable, seeing only a gradual decline over the first three years.

For SMEs it’s important to recognise that if you compete with large rivals, they have an advantage. Their size and profile makes them more robust. Large companies are able to reduce their marketing and advertising activity without experiencing any significant impact, at first.

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This table shows how sales trends changed for brands, as they stopped then restarted advertising. Even when they restarted, fewer brands saw growth, and an increasing number saw sales decline.

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The benefit of cutting your marketing spend is immediate. But the impact can last for years. Even if you resume your marketing activity after 12 months, you will struggle to compete in the recovery. Rivals who maintain their marketing activity will see sales recover more quickly. Research in 2018 found that even after resuming advertising, fewer companies are able maintain sales growth, and an increasing number saw it fall8. This scenario is well established. The graph below shows that research from the 1920s found a very similar outcome.

The reason companies find it hard to regain their sales, is that by reducing their marketing activity, they also reduce their profile. Competitors who maintain their marketing activity fill the gaps left by the companies that cut. The active companies are able to increase their profile, at the expense of more cautious firms. If companies are willing to increase their marketing activity, there is an opportunity to achieve even greater growth, at the expense of rivals.

As the economy slides into recession, what you do is important. But what you say is important, too.

When your customers’ finances are under pressure - whether they are businesses or consumers - there may be a greater focus on price. Customers are looking for opportunities to pay less. There is already evidence that supermarket customers are trading down to cheaper alternatives of their usual option. Despite this focus, price is just one consideration for customers, when they are considering a purchase.

But if price is the only thing you talk about in your marketing, it is what customers will focus on, and use as a comparison with your competitors.

So if you want to stand out, and avoid competing on price, you need to talk about something else. There are five factors your customers consider when they making a purchase - five benefits they are looking for from your product or service: price, quality, accessibility, availability and choice. We describe these as “functional benefits”, and they are relevant to pretty much any product or service.

? Quality is the perceived standard of the products and services you deliver, in the eyes of your customers.

? Price is the cost to your customers of the products and services you deliver.

? Accessibility is your customers’ ability to access the products and services you deliver.

? Availability is the volume or capacity that you are able to deliver to your customers.

? Choice is the range of product or service options you offer to your customers.

A recession puts the focus on price. But look at the other benefits. What are your strengths? What other factors are important to your customers? The better you understand your customers, the easier it is to do this. (We look at your customers in more detail in the next section.) If you can change the conversation and introduce new themes, it will give you an opportunity to stand out from rivals and avoid competing on price.

A recession makes the market more competitive - whichever market you’re in. But if you want to compete, you need to stay visible. To do this you need to take a positive approach and maintain your marketing activity. As your customers become more cautious, it is what you do and what you say that will determine the scale of your success over the next 12 months.