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The Criticality of Marketing in an Uncertain Environment

Marketing Investment
 
Jon Cullum - Industry Consultant

Try and call up an organisation right now and tell them they need to increase their marketing budget (ok excluding Amazon and Pharma) and you might just find yourself cut off. In many cases of course that is the right response. Some markets may never be the same again after this stubborn crisis abates and they need to adjust their investment to the market potential. Then of course there is the question of headcount and redundancy, nobody wants to see unemployment get out of control.

However other businesses will be weighing up marketing not against the head count, but rather against the general uncertainty of the future situation, or against the profits they will be able to report to the board. In these cases, the rationale is less robust. To think that this is a threatening time is unquestionably true but short term outcomes have to be balanced against long term benefit when marketing investment decisions are made.

While stock markets have been boosted by all the support being injected into some of the world’s major economies, it would be a brave person who would forecast that the world won’t be a tougher place to trade in on the other side of all these stimulus packages. Some markets will boom and many others will compete like hell to sell into those markets. So if you’re in a B2B world unless all your clients are pharma and medical supplies, you better be ready, and even if they are, you had still better be ready, as others are going to turn their focus on your clients.

Work hard, work smart & compete

So what to do? Well work hard, work smart and compete. Compete with all the weapons at your disposal and with a well thought out and executed strategy. And is marketing a weapon for a B2B business? It’s not a charming word for sure and I’m not planning to start using it in the office regularly but I would have to say that it is. Marketing is a weapon that has the potential to change minds in favour of your organisation and that is something few can afford to ignore.

Some will say that it’s better to downsize and adapt, others will say that there are other weapons, or perhaps tools is a better word, that we can utilise. These are valid points of course but I’d like to just look at the rationale behind the idea that marketing investment should decrease in uncertain times first.

Let’s say there is a £300M market for an electronic device growing at 8% per annum, with 3 major manufacturers sharing it equally. It’s estimated that the contraction in that market will be 10% as a result of the pandemic but the range of outcomes ranges from 5% contraction right up to 20% contraction. This makes the board of all 3 companies very nervous, as a 20% reduction in sales would mean significant losses. 2 of the companies go ahead and implement cost reduction programs with only minor staff reductions in production and operations (as these are harder areas to assess in terms of ensuring ability to deliver) and larger cuts in sales, marketing and other support functions. The 3rd business takes a different tack and decides to accept reduced profits but to keep cost reductions to a bare minimum and makes certain not to reduce budgets in sales, marketing or R&D. Now let’s say that it takes 4 years before the world has truly overcome the Covid-19 crisis and we’re back on a similar growth path. During that period at the first 2 companies, some clients became disgruntled by the reduced standard of customer service (thanks to headcount reductions) and migrate their business to the 3rd. Here is how the scenario might play out:

 

Company  1 – reduction in headcount in production and operations of 5% – Sales, Marketing & R&D – 15% reduction

Company  2 – reduction in headcount in production and operations of 10% – Sales, Marketing & R&D – 20% reduction

Company 3 – reduction in headcount in production and operations of 3%. No reduction in Sales, Marketing & R&D

Falling Service Standards = Loss of 1% of customers years 1 & 2 (to Company 3) 

Falling Service Standards = Loss of 2% of customers years 1, 2 & 3 (to Company 3) 

 

Gaining clients through maintaining service standards

Year 1 = Loss of 20% of turnover (10% recovered year 2)

Year 1 = Loss of 20% of turnover (10% recovered year 2)

Year 1 = Loss of 20% of turnover (10% recovered year 2)

New demand in the marketplace

Year 1 = 0%           Year 2 = 2%           Year 3 = 4%          Year 4 = 8%

Winning 25% of new demand

Winning 10% of new demand

They focus on a key feature and win 65% of new demand

(They also develop a new technical feature with a performance edge in year 4 – they win a further 2% of competitors business through intensive marketing)

Marketing Investments

Marketing Investments

Marketing Investments

Looking at the journey that those companies go through, the aggressive cost-cutting measures of company 2 initially pay off as they limit their losses to £3.8M in year 2 and over the 5 years lose just £4.3M. However, they pay the price in market share with a turnover 13% lower than they had pre-crisis at the end of the 5 years. Company 1 fairs somewhat better on market share being 8% down on pre-crisis levels but they suffer significant losses at £5.4M in year 1 and £8.2M over the 5 years. Company 3 suffers the worst losses of all in year 1 at £5.9M and after 3 years it still looks like maintaining their cost base has been damaging with losses of £9M. But at that point, the small gains they’ve been making in market share combined with a small innovation advantage delivers a real turnaround in year 4. Over the last 2 years of the period, they make £5M and suffer the least losses of the 3 companies at £4M. The real reward though is that their turnover is now 6% higher than it was pre-crisis and their market share is 5% higher than their nearest rival. The management team of this business (who must have been sweating through the first 3 years) suddenly are the clear winners.

Of course, the real world is not as simple as this example and another crisis can always come, or other factors can prevent the rewards company 3 above gets. But taking a rational view on a crisis, decisions about cost-cutting in sales and marketing should be based on factors like where the market will be post-crisis, what the longer-term opportunity is and what other markets and risks could come along.

In terms of what the message might be in those crisis marketing activities, there are different approaches but the essence is to create trust and focus on any compelling reasons to purchase now. Some clients will for sure be feeling cautious and delaying investments so longer-term benefits may count for less (you might say this blog is ignoring this advice!) but the angle may need to be adjusted for different sectors and regions.

Over the decades many businesses have managed to see the post-crisis opportunity and have maintained or even increased their sales and marketing drive. Here at Motion we always aim to take a strategic approach to marketing activities and would be happy to discuss how to best utilise your budget in these challenging times, be it stable or constrained.

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