Executive summary of “Should all service firms follow the recessionary advertising prescription?”

Citation

(2014), "Executive summary of “Should all service firms follow the recessionary advertising prescription?”", Journal of Services Marketing, Vol. 28 No. 3. https://doi.org/10.1108/JSM-03-2014-0111

Executive summary of “Should all service firms follow the recessionary advertising prescription?”

Article Type: Executive summary and implications for managers and executives From: Journal of Services Marketing, Volume 28, Issue 3

This summary has been provided to allow managers and executives a rapid appreciation of the content of the article. Those with a particular interest in the topic covered may then read the article in toto to take advantage of the more comprehensive description of the research undertaken and its results to get the full benefit of the material present.

Try being an advertising representative in a recession. Tough job. “Nobody wants to spend with them so they don’t see the point of advertising” is the common complaint as they return empty-handed from sales calls. Newspaper advertising dries up, there are fewer posters and billboards and the observant TV viewer will notice that the commercial breaks contain more plugs for forthcoming programs than for companies advertising their wares.

During slumps in the business cycle, firms are often tempted to reduce their advertising expenditure. However, academics and industry pundits alike recommend that firms should increase advertising expenditure during recessions. You can’t blame the managers who have hold of the advertising budget. They’re no doubt focusing on short-term outcomes, not least because they are likely to be compensated on short-term sales targets. So the downward spiral continues. Organizations stop – or dramatically reduce – advertising stuff and customers lose even more confidence in the future because the familiar advertisements for the things they liked to buy and consume disappear from sight.

Managers may focus their efforts on marketing activities that have immediate results, such as sales promotions, rather than taking a proactive marketing strategy that focuses on long-term brand building, such as advertising. Typical cost-cutting strategies are evoked during recessions and, coupled with decreased demand, this puts a financial strain on firms and may make some vulnerable.

If you are a company offering financial services, advertising during a recession might pose problems of a different kind. Investors may feel that the financial firms are to blame for the state of the economy and their increased advertising is merely an attempt to cover up for their mismanagement. This was certainly the case for many individual investors during the recent recession.

Advertising’s effect on profitability is hard to calculate, partially due to the difficulty of teasing out short-term (e.g. call to action) from long-term (e.g. brand building) effects. Furthermore, it is not easy to determine whether initial sales increases are sufficient to cover the costs of advertising. Likewise, the carryover effect of advertising often masks extreme short-term negative impacts from its reduction and are not immediately noticeable. Last but not least, other business expenditures may take more time and effort to scale back than advertising. As a consequence, many firms’ first response to a recession is to reduce marketing spending.

There’s nothing new in experiencing a dramatic reduction in advertising and marketing spending – as well as in media jobs – during a recession. Advertising budgets are among the first to be cut during economic downturns. The reason why academics and advertising executives recommend that firms should increase – or at least maintain – advertising spending during downturns is a “prescription” that relies on the notion that countercyclical or at least inelastic advertising effort during downturns leads to superior performance when the market recovers.

So what does this mean for service firms trying to decide whether or not to increase or decrease advertising expenditures during a recession? According to Assistant Professor Astrid L Keel et al. in “Should all service firms follow the recessionary advertising prescription?”, the answer to that very important question is: “it depends”. Managers must be aware that the type of service their firm provides influences whether increasing or decreasing advertising spending during a recession has a positive or negative impact on financial performance. Credence-based firms, such as those in the banking and insurance industries, should avoid increasing advertising spending during recessions, as it may lead to negative financial performance. Experience-based firms, such as those in the entertainment and travel industries, benefit financially from increased advertising during recessions.

Firms whose service product is relatively simple to evaluate after a customer has experienced it should, at the very least, maintain their current levels of advertising spending. In most cases, when budgets allow, this spending should actually be increased. Experience firms such as entertainment venues, restaurants, hotels and so forth should expect to come out of a recession with a much better stock valuation if they increase their advertising while the economy is in a downturn.

Therefore, the study findings tend to echo the sentiments of practitioners who have for years claimed that firms who advertise heavily during economic downturns tend to come out of these periods in better economic shape than their competitors. On the contrary, credence-type services appear to suffer the effects of recessions regardless of their advertising expenditures.

Regardless of the rationale for the effects of advertising on stock prices during a recession, managers are advised to understand the effects of consumers’ evaluation spectrum when making expenditure decisions. The service sector that a manager’s firm operates, in most cases, has a direct effect on the value of advertising during a recession.

To read the full article enter 10.1108/JSM-01-2013-0006 into your search engine.

(A précis of the article “Should all service firms follow the recessionary advertising prescription?”. Supplied by Marketing Consultants for Emerald.)