In business, as in algebra, certain formulas apply. An old reliable in the world of commerce is that when revenue gets tight and forecasts become grim, the cost-cutting ax is unsheathed, sharpened, and poised to swing. The first cut usually lands on the neck of the marketing department, which has its budget cleaved in the course of an unpleasant afternoon.
But that may not be such a good strategy. A study recently conducted by Getzler & Co., a New York-based corporate turnaround firm, indicates that most organizations experiencing a cash flow pinch are better off reducing operating costs than trimming back on sales and marketing expenditures.
The study evaluated the costs incurred by 190 struggling tech companies during the second and third quarters of last year. Faced with tough times, 46 cut their marketing budgets and 25 slashed operations. The surprising result: Firms that scaled back their marketing budgets saw losses more than double during the period, while companies that reduced operating costs maintained a constant rate of loss.
Although sales growth among the two groups remained nearly the same, there was a dramatic difference in profitability – with those that deleted marketing dollars winding up on the short side.
What to make of this? Spending on marketing and media seems to remain a far greater driver of profitability than spending on technology or the development of products and content. It’s not difficult to understand why: In this world of abundant choices, the only commodity that remains scarce is human attention. Each of us has only 24 hours per day to consider the millions of innovations and opportunities tossed up by the Networked Economy.
In times of economic uncertainty, companies that pull themselves off customers’ radar screens through marketing cutbacks stand to hasten their own final departure. The perception that your company has disappeared turns into a grim reality.
While the debate rages over whether brand matters anymore, the Getzler study would indicate it does. Brand-building has always been an elusive task, part art and part science. A strong brand links a buyer’s visceral and subjective experience with the product. It’s the difference between a bottle of Coke and a bottle of soda-customers attach personal memories and cultural associations to one but not the other.
Building brand awareness is not simply about throwing money at the moon. It’s about creating a consistent, emotional connection with your customers. It’s about building such an unbelievably great product that it helps people define their own identity: “I’m an eBay fanatic, a devotee of theonion.com, a CNET person.”
Virtually all pure Internet companies are still losing money. But those losses appear to be narrowing, and certain groups, including information providers such as VerticalNet, are edging toward profitability.
It would be a shame if some firms fell off the screen just as they were rounding the corner toward long-term success. Cost-cutting is never pleasant, but there’s an important lesson here for managers: Think before you chop.