Marketing spending strategy in recessions

Recessions provide challenges to managers seeking to develop and justify an appropriate level of marketfacing activity. The literature on the topic offers limited guidance on what strategy is most appropriate. We briefly review the literature on the topic and report on recent results that show (a) that R&D spending by B2BGoods firms and B2BServices firms in recessions increases both profits and stock returns, while advertising spending decreases both profits and stock returns; (b) for B2CServices firms, both R&D and advertising spending in recessions increases profits and stock returns and (c) for B2CGoods firms, R&D spending in recessions increases profits and stock returns, while advertising spending increases profits but decreases stock returns. Further, these effects are either strengthened or weakened depending on the firm’s market share and financial leverage. 2010 Australian and New Zealand Marketing Academy. Published by Elsevier Ltd. All rights reserved. Recessions happen repeatedly, even if the time of their occurrence cannot be easily predicted. And while a recession may be triggered by events in a single sector its effects are usually widespread. Hence, recessions entail a significant contraction in market demand for goods and services, lowering sales, cash flows and profits (Kijewski, 1982). And most firms cut franchise building investments in innovation and marketing to conserve resources, e.g., (Barwise, 1999). In this article, we focus on what the marketing literature has to say about firms’ marketing spending decisions in recessions. Marketing is concerned with the creation of value for firms and their customers through effective differentiation of goods and services. Two key marketing activities, R&D and advertising, are central for that differentiation. The outputs of R&D programs are new technologies, products, and processes that can create value for the firm through rent appropriation. Advertising leverages the output of R&D programs, creating awareness of products, increasing sales, building brand equity and inducing customer loyalty. During recessions, firms are pressed to control costs to maintain liquidity; hence R&D programs, which have limited ability to increase short term cash flow, see close scrutiny. However, if a firm cuts its R&D spending, it risks losing its long term technological advantage. In spite of that risk, a report from the Federal Reserve notes, ‘‘R&D, one important source of economic growth, falls rather than rises during recessions, even for firms that do not appear to be credit constrained.” (Barlevy, 2005, p. 1). A similar situation occurs for advertising programs. While some observers (e.g., Welch, 2009) suggest an aggressive approach to spending in recessions, most firms appear to view advertising as a dispensable luxury in recessions (Biel and King, 1985). Scholars and practitioners have studied the effects of advertising in recessions on firm performance and the evidence from these studies is mixed. For example, some studies (Frankenberger and Graham, 2003; Graham and Frankenberger, 2009) report that increases in R&D and advertising spending (see Kamber (2002) for advertising only) in recessions increases firms’ earnings; others report that cutting advertising in recessions does not affect firms’ profits (Kijewski, 1982). The mixed evidence for the rewards to R&D and advertising spending in recessions may arise because of firmand market-level contingencies in the rewards to firms’ marketing spending in recessions, which we examine here. For example, focusing on the 2001 recession in the United States, Srinivasan et al. (2005) find that a firm’s trait that they term marketing proactivity—the interpretation of the recession as an opportunity and the execution of a marketing response to capitalize on that opportunity—improves firm performance. A way to think about their findings is as follows: firms with the will (the nerve or culture), the skill (marketing and customer knowledge and the ability to turn that knowledge into strategy) and the till (resources to fund investments in a downturn) are amply rewarded both during and after the recession. Think about cyclists in the Tour de France–the fittest and strongest don’t attack on the flat or early in the race but attack on the roughest, steepest, most gruelling sections. Attacking when times are tough allows them to separate themselves from the weaker cyclists and provides them a return later on. And what about the weak cyclists? Our research says that they can try to keep up with the strongest (trying to chase 1441-3582/$ see front matter 2010 Australian and New Zealand Marketing Academy. Published by Elsevier Ltd. All rights reserved. doi:10.1016/j.ausmj.2010.06.002 * Corresponding author. Tel.: +1 814 863 2782; fax: +1 814 863 0413. E-mail addresses: [email protected] (G.L. Lilien), [email protected]. edu (R. Srinivasan). 1 Tel.: +1 512 471 5441; fax: +1 512 4711034. Australasian Marketing Journal 18 (2010) 181–182