January 28, 2021 • 9 min read
Growth leaders are in the midst of a unique pandemic induced recession. For many it is their first as a business leader. For most it is putting tremendous pressure on the decisions they make in 2021. “It is critical to for growth leaders to learn from the past to make the right decisions during this recession because those actions will have major and immediate implications to their future profits, competitiveness, and career,” warns Professors David Reibstein, Professor of Marketing at the Wharton School of Business.
Economic downturns are not rare occurrences. There have been 17 economic contractions over the past 100 years according to the National Bureau of Economic Research (NBER). Given the regularity of these economic downturns, we should have plenty of opportunity to learn from history. In particular, what did companies do to manage through previous crises, what worked, and what did not.
To help CMOs learn from the past and make the best possible decisions about where, how, and when to invest in the current recession to maximize firm revenues, profits, and share, the Wharton Business School published the Markets in Motion Study. Professors David Reibstein and Raghu Iyengar of the Wharton Business School led an in-depth analysis that examined how business leaders should adapt to the current recession in the context of history. This effort included all known academic research and a survey of over 350 CMOs to understand the actions growth leaders are taking today in the wake of the Covid-19 recession.
The analysis looked at (a) aspects of firms’ behavior that are similar to those in previous recessions, and (b) unique elements of market dynamics brought about by the pandemic. The findings provide clear guidance on what growth leaders need to be doing during the recession to thrive in the post-pandemic environment. And what common mistakes to avoid.
Some facts are consistent across recessions.
· Demand shrinks for a period of time – 11.75 months on average.
· Managers reduce budgets for advertising and new product innovation during recessions, despite evidence that it neither improves short- or long-term profitability.
· Recessions lead to industry shakeups and realignments in the marketplace into the recovery. “During an economic downturn, an average of 17% of firms fail and more lose share, profit, and revenue leadership,” reports Professor Iyengar. “As an illustration, a study of 2,500 companies during the 2001 recession found a significant change in market leadership. Around 24% of firms moved from the back of the pack to a leadership position and 20% of the top firms dropped to the bottom quartile.”
The most significant finding is that those firms that increased advertising and innovation investment during recessions grow in market share and in profits not just for the short term, but for the long run as well.
The survey of CMOS revealed that in some ways this recession is no different. 98% of the CMOs we surveyed feel the current recession will impact them significantly. For about 14 months. 70% of businesses expect revenues to fall. Half of CMOs anticipate revenue declines of between 10% and 100%. One third of the CMOs believe the changes in how they go to the market brought on by the current recession will be permanent.
Some aspects of the current pandemic induced recession are new and unique.
· Revenue plans suffer from both a lack of demand and access to demand that exists. Unlike other recessions, the lack of access to customers and markets plays a much bigger role in the current pandemic. This lack of access was cited as the #2 risk factor to the business overall. “Closing enough business in physical (retail, face to face sales, and events) channels” is regarded as the biggest risk to the revenue plan by 41% of CMOs. Three-quarters of CMOs report that changes to attendance at events and conferences are negatively impacting their sales and marketing effectiveness and competitive positioning in the market.
· The pandemic is forcing businesses to accelerate the transformation of their selling channels to a digital and virtual commercial model. Digital channels and media are a bigger factor in how the contraction is impacting different businesses. And most CMOs see opportunity in building virtual channels and delivering digital experiences to remote customers to exploit remote customers. And an overwhelming 82% of CMOs believe their response to the COVID-19 epidemic change provides them the opportunity to redefine the customer experience in digital and virtual channels.
“The pressure to gain access to markets and adapt to work at home/stay at home customers is shaping the response of most CMOs to the recession,” according to Reibstein. “The vast majority of CMOs in the survey reported pressure to develop virtual selling channels as a priority in their current and future investment strategy.” Most CMOs view the changing use of Direct to Consumer channels for both consumer and b2b businesses, time spent on mobile devices and the receptivity of buyers to direct and virtual selling as very positive to their revenue prospects in the longer term. These beliefs are reflected in their desire to increase spending on new direct to customer channels and digital technologies to improve sales coverage while at the same time decrease spending on face to face sales and events.
Markets in Motion Study
The analysis has two clear recommendations to business leaders:
a. Increase investing in marketing and innovation during the recession if you can. While conventional wisdom and current management behavior suggests cutting discretionary spending on marketing and innovation in the face of shrinking demand is the accepted course of action, historical facts suggest otherwise. “At a time when 66% of businesses have cut spending on marketing and innovation, there is no evidence cutting spending in a recession improved profits, growth or share in the short or long term,” asserts Professor Iyengar. “In fact, our analysis strongly indicates that investing during a recession is a smart and valuable investment, particularly through the lens of growing profits, share and firm value. Yet, 10% of today’s CMOs told us they plan to increase growth investment during the recession.”
b. Or anticipate and prepare for significant changes if you cannot. Another lesson is that business leaders should not expect a return to the status quo in the recovery. “The facts show that recessions significantly restructure markets and only a fraction (under 10%) thrive in the following years,” according to Professor Reibstein. “Many of the changes in customer behavior, sales force engagement, and general business models are not temporary, but may lead to a fundamental change in behavior. A third of CMOs believe their go-to-market model will change forever as a direct result of this recession. It is best to be out in front of this business transformation than lagging behind.”
Marketing leaders must make some very difficult and important resource allocation and investment decisions in the coming year. And most of them (98%) will not have the luxury of additional funds to make these changes in 2021 according to the research. “The decisions growth leaders make on where to cut, invest, and refocus their growth resources will disproportionately define their future profitability and competitiveness in the new buying reality,” warns David Reibstein. It’s hard to garner internal support for spending on growth during the downturn. But the historical evidence is clear – the return per dollar spent may never be greater than what can be gained by spending at this time.”
“This is important for both the short-term as well as the long-term,” echoes Professor Iyengar. “New leaders will be determined today that will persist well into the recovery. The future of the business will be defined by how one spends in the present.”
Leading brands like Heineken and the Equitable are embracing this historical evidence by “doubling down” and continuing to invest in their customer relationships, growth partners, and brands for the long term. But in doing so, they are adapting the focus and execution of their growth investment to the unique nature of this pandemic-induced recession to capitalize on the opportunities it presents to them in the pending recovery.
For example, Jonnie Cahill, the CMO at Heineken USA, pivoted his marketing spend to simultaneously support their bar and restaurant partners who have suffered disproportionately during the pandemic, while enabling digital channels to deepen their relationship with consumers at home who are buying more of the product. As part of that Heineken had to significantly adapt their marketing focus from the staples of sports media, sponsorships, and sampling to innovating in digital channels in ways that deliver a comprehensive customer journey.
Connie Weaver the CMO of the Equitable drew upon her experience as CMO during the 2008 financial crisis to successfully execute a brand launch during the pandemic. Her launch plan, established for January 2020, had to be completely changed by March because of the significant changes to the market and challenges it presented to its core customers and partners. She drove her team to quickly refocus their research, content, and channels to adapt to the changing behavior and sentiment of core partners and customers – many of whom are teachers on the front lines facing the risks and uncertainties the pandemic brings. “Like 2008, the world has changed and there is not going back,” shares Connie Weaver. “But I would not say these is a new normal. Rather, 2021 is going to bring a whole series of “nexts” we need to adapt to, and it’s up to growth leaders to push their teams and partners to be agile and constantly innovate their go to market to arrive at some sort of hybrid of the old and new that works for their markets and customers.”
You can learn more about this research, and importance of making investment decisions during the recession by reading the full Marketing in Motion report at this link.
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