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The Cost of Stagnance - Part 2/2

What brands lose when they sever customer relationships in a crisis - this is a summary of the academic paper published by Tellis et al in 2009. Tellis is currently the director of the Center for Global Innovation at the Marshall School of Business, the University of Southern California.

A Critical Review and Synthesis of Research on Advertising in a Recession

This piece by Gerard J. Tellis and Kethan Tellis does an excellent job of framing the best arguments for and against whether a business should engage in advertising during a recession.

Following an excruciating review of 40 academic entries on the subject, the authors found this as the most compelling argument for a business to keep their advertising budgets conservative:

“Sales during a recession are likely to be lower than during an expansion. If the firm were advertising optimally during the prior expansion then the optimal level of advertising may well be lower in the subsequent recession because sales are lower.”

And the most compelling argument in favour of advertising during a recession:

“Most firms tend to cut back on advertising during a recession. This behavior reduces noise and increases the effectiveness of advertising of any single firm that advertises. Thus, the firm that increases advertising in this environment can enjoy higher sales and market share. When the economy expands, all firms tend to increase advertising. At that point, no firm gains much. However, the gains of the firms that maintained or increased advertising during a recession Persist.”

The authors’ meta analysis also found evidence that restricting advertising budgets during a recession does not have the desired effect of preserving or increasing profits. In fact the significant predictor of marginal changes in sales during a recession is marginal advertising expenditure.

Key Points

  • The best argument for shrinking ad budgets during a recession depends on the firm maintaining optimal advertising levels during the prior expansion period

  • Even still, this does not account for the opportunities a recession offers a firm when it finds itself in an uncharacteristically quiet market, with elevated access to consumers

  • Evidence shows restricting advertising budgets during recession does not lead to increases in profits; in addition, an increased advertising spend is directly linked to marginal increases in sales

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