Companies that re-examine the effectiveness of their marketing spend will do better in the long run than those that panic and slash their ad budgets

The next quarterly Bellwether Report from the Institute of Advertising Practitioners (IPA), due out imminently, is likely to show that advertising budgets have been cut for the fourth quarter in succession. The survey is widely regarded as a confidence barometer for the economy as a whole, not just the advertising industry. The last report, issued in July, found that the rate of decline in ad budgets was approaching that seen in the immediate aftermath of the 9/11 terrorist attacks.

Marketing budgets are traditionally one of the first casualties of a downturn, because finance directors see marketing—and advertising in particular—as an area of discretionary spend. It is a sort of Pavlovian response to falling profits, consumer spending and consumer confidence.
The problem is, it is often exactly the wrong thing to do, because it can starve the business of the one thing that will see it through a downturn—consumer demand.

It is a brave business that holds or even increases its marketing budget when everyone else is slashing theirs, but studies show that such businesses do better than their rivals in the long term. This is partly because there are real media bargains to be had and massive opportunities to gain market share.

But there are two important caveats to this strategy. The first is that doing lots of marketing does not of itself guarantee success. Other corporate elements have to be in place, too. The second is that much marketing spend is wasted. For a whole host of reasons, many marketing budgets could easily be cut without a massively detrimental effect on demand.

Research published in spring 2007 by McKinsey & Co found that while many companies were unprepared for the last recession in 2000 to 2001, those that were prepared emerged from the recession more strongly than they had gone into it, often leapfrogging their less well prepared competitors in the process.

These post-recession leaders shared some common characteristics. On entering the downturn they typically maintained lower debt on their balance sheets, controlled their operating costs well and diversified their product offerings and geographical spread. This gave them a high degree of strategic flexibility that allowed them to take advantage of the opportunities that recession threw up-such as buying cheap assets from distressed sellers and getting lower prices and better service from their suppliers in exchange for paying them faster.

Making their overhead costs and operations more flexible before the recession meant these successful companies didn't have to lay off many people when economic conditions changed—something that could have compromised their ability to attract and retain talent in the future. It also allowed them to sustain their R&D and advertising spend. As Reckitt Benckiser's recent trend-bucking performance demonstrates, marketing is most effective when promoting new products.

But while indiscriminate cost-cutting is definitely not the answer to an economic downturn, even a very quick back-of-the-envelope examination of the effectiveness of their marketing spend would serve most companies well.

It's amazing how many businesses buy media space as part of a grandiose global or European campaign in countries where they don't even have distribution, for example. Likewise, many businesses continue to invest in brands that are losing them money. Others cut permanent staff in the marketing department only to re-employ them as  highly paid consultants. Yet others undermine very effective advertising campaigns with value-destroying "two-for-one" price promotions.

And sadly, many marketers seem to be constitutionally incapable of learning from what they do. Even if they evaluate the effectiveness of their activities, they tend to sweep failures under the carpet and move on to their next trick.

The finance director of a big utility business told me the other day that if his company halved its marketing spend the world would be unlikely to fall in. His marketers would no doubt be aghast. But do you know, despite the potential for well spent marketing money to transform a company's fortunes, I think he might have had a point.