Spend now, benefit later

Mortgage brokers are being advised to expand the range of products they offer to generate additional income streams. Protection, secured loans, buy-to-let and equity release are just a few of the non-core products available to ambitious brokers who are willing to diversify, but expanding a product range is often easier said than done.

Support is available from networks, master brokers and other specialists, but without a clear marketing strategy brokers are unlikely to maximise their financial returns.

While they can and should cross-sell products to their existing clients – especially protection, given the current economic climate – brokers also need to attract new business.

Of course, the marketing budget is often one of the first areas to be cut in companies when the going gets tough and many would argue that if money is not being made, there can be no funds set aside from profits to pay for such activity.

This is an understandable argument but I have noticed a trend among some of the smartest businesses – they are increasing their marketing spend in these tough economic times rather than cutting back, and they are using profits set aside during the good times to fund this activity.

These firms believe it is easier to build market share during a downturn because there is less marketing competition – competitors have often cut back or stopped this activity.

Furthermore, the cost of marketing is likely to be considerably lower during a recession so it provides more bang for the buck. This approach also puts smart marketers in a strong position when the recession passes as they will have built stronger, higher profile businesses for significantly less cost than their competitors will incur in more buoyant market conditions.

In March 2008 John Quelch, a professor at Harvard Business School, published an article in the Financial Times espousing just this sentiment.

Quelch said: “It is well documented that brands that increase their advertising during a recession when competitors are cutting back can improve their market share and return on investment at lower cost than during good economic times.”

The key is to look at your marketing spend as an investment rather than as an expense. If you cut your marketing budget, how will clients find you? You will have severed your business lifeline and scuppered any hope of growth.

A study in the International Journal for Research in Marketing found that firms entering a recession with a strategic emphasis on marketing, an entrepreneurial culture and sufficient reserves of underutilised workers, cash and production capacity are best positioned to approach recessions as opportunities to strengthen their competitive advantage. Conversely, the study also found that firms without these strategic traits are unlikely to derive economic benefits from a proactive marketing response during a recession. Such companies are better served by not increasing marketing spending until conditions improve.

So the decision depends on circumstances but I am confident that many of those reading this article fit into the former camp.

A separate study of marketing behaviour among 600 companies during the 1981/82 recession showed that firms which maintained or increased advertising during the economic downturn grew 275% during the mid-1980s, while those which cut back grew only 19%.

The reality is that in boom times just being there guarantees some level of business but in busts you have to fight tooth and nail for your share of the pie.

We need to know how consumers are redefining value and responding to the recession. Price elasticity curves are changing as consumers take more time searching for financial products and are likely to negotiate harder when they buy. They are more willing to postpone purchases, trade down or buy less.

This is why we need to communicate the value of our products and services, such as the benefits of protection insurance in the current market or the rationale for taking on a buy-to-let property while house prices are relatively low and returns from high street bank savings accounts are not attractive.

It is also important not to underestimate the importance of customer service in the present circumstances. Consultants Bain & Co report that a 5% increase in customer loyalty can lead to a 40% to 90% increase in the lifetime value of customers. Therefore it is worth investing in marketing to position your business as service-focused as well as communicating the benefits of buying certain financial products in the current market.

So there is a great deal of evidence suggesting that it’s not a good idea to reduce marketing spend during a recession in order to hit financial targets. Doing so may leave your business in a less competitive position when the economy recovers.

Over the years, studies have confirmed that the best strategy in terms of long-term return on investment is to increase marketing expenditure during an economic slowdown.

An analysis of the profit impact of marketing strategies, presented at an IPA conference in March 2008, provided the latest evidence. This analysis compared the results achieved by companies that increased, maintained and reduced marketing spend during periods of recession. The metrics used were return on capital employed (ROCE) during a recession, ROCE during the first two years of the recovery and change in market share during the same period of recovery.

While companies that cut their marketing spend enjoyed superior ROCE during the recession they achieved inferior results after the recession ended, while during the recovery the spenders achieved significantly higher ROCE and gained market share.