There are both winners and losers in the economic shock of the COVID-19 recession, but whichever category a firm finds itself in, it needs to tailor its advertising strategy accordingly, in both the short and long-term, advises Gerard J. Tellis.
This month, The WARC Guide looks at marketing in the COVID-19 recession, which, as GroupM’s Brian Wieser has made clear, will be both longer and deeper than expected – even countries that escaped the worst of the pandemic can’t avoid the economic consequences. (Subscribers can read The WARC Guide to marketing in the COVID-19 recession in full here.)
Writing in The WARC Guide, Tellis, Neely Chaired Professor of American Enterprise, USC Marshall School of Business, notes the body of evidence that suggests a positive impact for companies that keep advertising during a recession.
When faced with a recession, most firms cut back on advertising, because they use a percentage of sales approach to budgeting, he explains: ad expenditures are set as a percentage of expected sales in the next quarter or year, but since, in a recession, sales are expected to decline, firms spend less on advertising; by the same token, firms spend more on advertising in an expansion, because sales are expected to increase.
“We found the elasticity of ad spending as a function of recessions and expansion to be 1.4,” Tellis reports. “That is, for every one percent increase or decrease in the economy, firms would increase or decrease ad spending 1.4 percent.”
But sub-pro-cyclical spending tends to be sub-optimal for reasons related to media costs and the ‘noise’ from competitive advertising. It’s better to maintain or increase spending in a recession than doing so in an expansion.
Tellis cautions, however, that the COVID-19 recession of 2020 is unlike any other that the US has had. “Stay-at-home orders and lockdowns have frozen demand in entire swaths of the economy,” he points out.
“This situation is not merely reducing demand by 10% or 20 %. This shock brings demand down to zero!” So a different approach may be required.
If demand is literally zero, there might seem no point in advertising. For example, gyms are closed and no new members will sign on while existing members will either get or claim refunds.
But gyms could still take their offerings online: prior group sessions can easily be transferred online, with the same instructor appealing to the same groups (via social media) – and that would require advertising to consumers to tell them of the new offerings. The same is true of other services shifting online.
Other categories, however, face more existential challenges and will have to reconsider their business models – and for businesses operating in them, advertising would only make sense after they were able to make the transition to a new portfolio of offerings.
Read Gerard Tellis’s article in full for more details on the advertising decisions that brands should consider during this recession. Gerard will be discussing these further in a webinar on May 19 as part of the WARC Talks 360 series. You can register here.
The WARC Guide is a compilation of fresh new research and expert guidance with WARC’s editorial teams in New York, London, Singapore and Shanghai pulling in the best new thinking globally. It also showcases the best on WARC – case studies, best practice and data sourced from across the platform.
Sourced from WARC