I bet you didn’t know it, but now is the time to become an industry giant in your niche. However, with Nevada’s unemployment rate hovering near 12%, it is easy to see why many small business owners are approaching 2013 with trepidation.
But it is important to realize that people do not simply turn off their spending during recessions. In fact, far from it. People still shop for products and services they need; they just hunt a little bit harder for the better deals. And they don’t just want lower prices; they also want superior quality of whatever it is they are buying.
And this is not just me talking here. There are a plethora of companies who have used the strategy of increasing marketing and advertising budgets during Depressions and Recessions and came out of it virtually on top, or at least sharing the top.
Here are a few examples of companies who expanded their marketing budgets during Depressions and Recessions:
Some Depression-Era Examples
Proctor and Gamble is the quintessential prototype. Founded in late 1837, it has successfully navigated many economic turmoils throughout its history. During the Great Depression, Proctor and Gamble won even more business and consumer mindshare by increasing their advertising when competitors cut back. They embraced new advertising outlets such as radio, and pioneered novel marketing concepts, essentially creating the entertainment genre of soap operas. This philosophy continues today: P&G does not reduce advertising budgets during tough times. If anything, they increase them.Chevrolet ousted Ford as the automotive industry leader. Even though Ford outsold Chevy 10 to 1, by 1931, due to increased advertising (and Ford’s lack of it), Chevrolet became the dominant car maker. Though I’m sure if you consider today’s landscape, they’re not a great example… but that’s another story.
Camel Cigarettes was the market leader in tobacco, but faced increased competition from Lucky Strike and Chesterfield cigarettes. Camel countered with more advertising, and it’s aggressive response paid off, as they regained the top position in 1935. Advertising turned the tide.
Some Recession Examples
But success stories aren’t limited to the depression – many of today’s most successful companies were founded and thrived during deep recessions because they were smart fiscally and marketed wisely.FedEx Corp started business in 1973 during the gas crisis-led recession. In spite of relying on gas-guzzling trucks and planes to ship packages around the country, it succeeded and grew. Not only because it could deliver overnight, but because it communicated that it could do so, and convinced businesses that it was the better option.
Microsoft Corp was similarly founded in 1975 during the continuing economic turmoil. The combination of Bill Gates’ business savvy, and continued investment in marketing, helped it to survive and thrive – even ousting its earliest benefactor, IBM, as Microsoft overtook the personal computer and business computing market. No one can deny that Microsoft spends heavily on marketing in good times and bad – even if sometimes it misses the mark.
CNN began its life during the tight times of 1980. And by capitalizing on the quickly-spreading cable industry, it transformed into the preeminent 24-hour news channel. It did this through quality reporting and through strong branding and marketing. Perhaps they’re not top banana anymore, but they still defined the all-news, all-day concept.
More Contemporary Examples
And even during recent and current economic collapses, which have seen the ruination of 100 year old companies – smart companies have increased revenue. Often with a combination of foresight, cunning, luck, and a healthy dose of marketing when others are not – these companies soar to the top.Method started in 2000 during the dot-com bust. The founders used guerilla marketing and pure entrepreneurship to keep things going through the early days – making the products and hawking them personally to store managers. But this helped them hone their pitch, and readied them for later success. And as stated by one of the founders on inc.com, “Starting a business in a recession is like vacationing in the off-season,” says Ryan. “It’s a little less crowded, and everything starts going on sale.”(5)
Verizon invested in building out its fiber-optic network, and has been able to reap the rewards of doing so. It’s able to compete against cable companies and other phone companies to offer competitively-priced deals for phone, TV, and internet. And by “promoting the hell out of it in TV ads” they’ve attracted both the price-conscious and the high-end consumer. “As one analyst put it, ‘FiOS lets Verizon play offense in a defensive market.’”(4)
Harvard Business Review did a study and found four primary strategies business owners employed during depressions and recessions last century.
Here are the four strategies:
Prevention-focused companies, which make primarily defensive moves and are more concerned than their rivals with avoiding losses and minimizing downside risks.
Promotion-focused companies, which invest more in offensive moves that provide upside benefits than their peers do.
Pragmatic companies, which combine defensive and offensive moves.
Progressive companies, which deploy the optimal combination of defense and offense.
Prevention-focused Companies
Sony embarked upon a defensive strategy during the 2000 recession. They increased profit margins by cutting its workforce by 11%, Research and Development by 12%, and capital expenditures by 23%. The result? Sony’s growth in its sales fell from an average of 11% before the recession to 1%
after the recession.
Even worse, Sony now has to contend with innovative, hungry competitors such Amazon, Microsoft, and Samsung for a smaller piece of the market share.
A focus solely on cost cutting causes several problems. One, executives and employees start approaching every decision through a loss-minimizing lens. A siege mentality leads the organization to aim low and keep both innovation and cost cutting incremental. Two, instead of learning to operate more efficiently, the organization tries to do more of the same with less. That often results in lower quality and therefore a drop in customer satisfaction. Three, cost-cutting decisions become centralized: The finance department makes across-the-board cuts, paying little attention to initiatives that may be the nuclei of postrecession growth. Four, pessimism permeates the organization. Centralization, strict controls, and the constant threat of more cuts build a feeling of disempowerment. The focus becomes survival—both personal and organizational.”
The lesson? While it is probably necessary to cut some costs during recessions, don’t only rely on cost-cutting as your primary strategy, because Harvard’s research shows that companies who utilize this strategy fare the least well during recessions, and recover the slowest.
“They trail the other groups, with growth, on average, of 6% in sales and 4% in profits, compared with 13% and 12% for progressive companies. Whereas in the three years after the 2000 recession, sales for the 200 largest companies grew by an average of $12 billion over prerecession levels, the prevention-focused enterprises among them saw sales grow by an average of just $5 billion. Moreover, cost cutting didn’t lead to above-average growth in earnings. Postrecession profits for prevention-focused enterprises typically rose by only $600 million, whereas for progressive companies they increased by an average of $6.6 billion.
Promotion-focused Companies
These types of companies are the polar opposite of the purely cost-cutting Prevention-focused Companies. Motivated by an overarching sense of optimism, these types of companies will make rash moves in defiance of grim realities.
Instead of understanding that their customers now demand more value from them for less money, they will innovate and try to offer more bells and whistles instead of lowering prices.
Even worse, this type of approach can have a negative effect on company culture, a culture that disregards and marginalizes naysayers who may indeed have some valid points. It is hard to get a clear picture of what the market is doing because everybody is so darned optimistic.
And their profits are not much higher than those who use the Prevention-focused tactics:
Despite a focus on growth, promotion-focused companies’ postrecession sales and earnings rise by only 8% and 6% respectively, whereas those of progressive companies’ shoot up by 13% and 12%. Among the 200 largest companies that tackled the 2000 recession, promotion-focused enterprises grew sales by $15 billion and profits by $1.5 billion, on average—far lower than progressive companies’ average increases of $28 billion in sales and $6.6 billion in profits.
The lesson? It’s okay to focus on growth, so long as you are being realistic in your expectations. Those who are not are likely to be blindsided by financial pain later on down the line that could have been avoided had they employed a more progressive strategy (utilizes both Prevention and Promotion-based tactics)
Pragmatic Companies
These types of companies rely on both Prevention and Promotion based tactics, although not optimally.
These types of companies tend to focus more on operational efficiency to cut costs rather than layoffs (that is not to say that these companies will not engage in layoffs; they often do, just less than Prevention Companies). One of the upshots to this is that morale is higher at these types of companies, and if morale is higher, employees will work harder and more creatively to reduce costs. These reductions are usually permanent, allowing for higher profits later on down the line when overall demand in the economy increases.
During the 2000 recession, Office Depot and Staples took differing approaches to cost management. Office Depot cut 6% of its workforce, but it couldn’t reduce operating costs significantly. Although the company created an incentive plan to boost sales, its sales growth fell from 19% before the recession to 8% after—five percentage points below Staples’ postrecession sales growth rate.
By contrast, Staples closed down some underperforming facilities but increased its workforce by 10% during the recession, mainly to support the high-end product categories and services it introduced. At the same time, the company contained its operating costs and came out of the recession stronger, bigger, and more profitable than it had been in 1999. Its sales doubled, from $7.1 billion in 1997 to $14.6 billion in 2003, while Office Depot’s rose by about 50%, from $8.7 billion to $13.4 billion. On average, Staples was about 30% more profitable than its archrival in the three years after that recession.
The lesson? Companies that are creative in their cost reduction tactics fare better than those who simply engage in layoffs to survive.
Progressive Companies
These types of companies fare best of all during recessions. Instead of allowing pessimism to dictate policy, they develop new markets and invest in enlarging their asset bases. Because prices are depressed, they can invest in things that increase operational efficiency at lower costs than in non-recessionary periods, such as property, plants, equipment and other capital. The money that they save also allows these companies to invest more on Research and Development and marketing, which makes roaring out of recession a much easier task.
One of the unlikely success stories who utilized this strategy is Target:
Let’s look at how one company has managed this difficult balancing act. During the 2000 recession, Target increased its marketing and sales expenditures by 20% and its capital expenditures by 50% over prerecession levels. It increased the number of stores it operated from 947 to 1,107 and added 88 SuperTarget stores to the 30 it had already set up. It expanded into several new merchandise segments, ramped up investment in credit-card programs, and grew its internet business. The company made several smart choices along the way. Instead of trying to go it alone online, Target partnered with Amazon to sell its products. It also teamed up with well-known designers such as Michael Graves, Philippe Starck, and Todd Oldham to cement its reputation for cheap chic, thereby differentiating its products.
Meanwhile, Target relentlessly tried to reduce costs, improve productivity, and enhance the efficiency of its supply chain operations. For instance, in 2000 it was one of the 12 retailers that founded the WorldWide Retail Exchange, a global business-to-business electronic marketplace, to facilitate trading between retailers and vendors. In January 2001 Target consolidated its Dayton’s and Hudson’s stores under Marshall Field’s to take advantage of the well-known brand name. These moves helped the company grow sales by 40% and profits by 50% over the course of the recession. Its profit margin increased from 9% in the three years before the recession to 10% after it.
If you didn’t notice by now, Target innovated in a way that ensured it would keep up with its arch-rival Wal-Mart: by offering food.
Many CEOs find investing in bargain-basement assets a tempting offensive move in a downturn. But the revenues and profits from opportunistic investments can take a long time to materialize, leaving a company saddled with an asset base that doesn’t significantly boost returns. As TJX found, focusing purely on assets also keeps companies from looking for more-imaginative ways to build new businesses that will drive growth when the recession is over.
Target hasn’t faced this problem. During the current recession, the retailer initially saw a decline in same-store sales, in part because Wal-Mart’s message of everyday low prices went down well with customers. Realizing that spending on “wants” was decreasing sharply, Target strengthened its position in a key “needs” segment: food. It launched a new store format that doubles the amount of floor space devoted to food; extended the range of its food brands, Market Pantry and Archer Farms; and overhauled its operations to support the emphasis on food. The retailer also increased media spending and reaffirmed its positioning with the slogan “Expect more, pay less”—with an emphasis on the second half. These are early days, but the results appear promising: By 2008 Market Pantry’s sales had increased by 30% and Archer Farms’ by 13%. And food has become a $1.8 billion business for Target.
It is important to realize that companies that think on their feet during recessions not only survive recessions. they come roaring out of the recession stronger, more innovative, and more profitable than before the downturn. They use the circumstances of recession in their favor in a kind of financial aikido that does 
not fight business reality, but goes with the flow of that reality, and tend to emerge victorious (though this is not, of course, guaranteed).
One of the ways many progressive companies are increasing both operational efficiency is to increase their marketing budgets to emphasize more on search engine optimization, pay-per-click marketing and social media marketing.
S recent study by NetBooster (http://econsultancy.com/us/blog/9982-search-and-social-media-marketing-spend-remains-strong-new-report), found that, after surveying 300 UK in-house marketers and 200 agencies:
62% of the companies intended on increasing social media marketing budgets (5% will decrease spending here)
57% of those companies were going to increase their SEO budgets (5% intend on decreasing SEO spending)
49% of companies plan on increasing spending on pay-per-click marketing (11% plan reducing spending on PPC)
While internet marketing may not be for everyone, it certainly has helped many businesses not only survive the recession, but thrive. Contact Go SEO today at 702-523-6680 to find out if our internet marketing services can provide your company the ROI it needs to beat your competition. It already has for our clients.
© 2012, alan. All rights reserved.
alan
An upstart by definition, Alan Villegas is one of the co-founders of Go SEO, an internet marketing firmed based in Las Vegas. A serious entrepreneur with a tireless work ethic, he has helped countless clients turn their websites into money-making, lead-generating machines.
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