Alex Steer

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No, you shouldn’t cut your marketing budget to help with the cost of living crisis

476 words

Marketers, like all of us, are right to worry about the rising cost of living, and want to help. But suggestions that brands should cut advertising budgets as a way of lightening the load on their consumers are misguided.

I get it - nothing seems quite as self-serving as a marketer telling you to keep marketing during hard economic times. So let’s look at the numbers. (Yes, I need to add the sources for these.)

Unsurprisingly, businesses invest in marketing because the returns are greater than the outlay. The returns are what pay salaries (and capital costs, shareholder dividends, etc). In general, money spent on marketing leads to more money coming back in.

Across all categories, businesses spend around 3% of their revenues each year on paid marketing promotion through media (aka advertising). And each year, about 12% of sales revenue is driven by the short-term effect of this advertising pressure. In general - across categories, brands and markets - for every $1 a business spends on advertising, it gets $4 back on an annualised basis.

Across all industries, c30% of revenue goes on staff costs. In other words, for every $1 spent on marketing, from the $4 of revenue returned, about $1.20 in staff salaries is returned.

So on average, if you cut your advertising budget by $1 million, you will need to cut your staff costs by c$1.2 million over the next year. In other words, based on median salaries and staff cost overhead ratios, if you are a typical business in the US, for every $1 million reduction in advertising spend, you will need to lay off 17 people over the next year. (Yes, this is an average. Stronger brands which can sustain demand will be less affected; newer or weaker brands will be more affected.)

What about the wider effect on consumers? The argument here is that by cutting marketing you will suppress aggregate demand, helping consumers save money.

There’s some evidence for this. Based on econometric studies from the EU and UK, around 4% of annual GDP is due to the effect of advertising on consumption. Advertising does stimulate aggregate demand (it’s why we do it). But it also creates jobs. Around 2-3% of employment is due to the same demand-creation effects of advertising. So by removing advertising spend from the economy you are increasing the likelihood of people being made unemployed.

Taking the UK as an example, annual advertising spend is c.£32 billion, and there are c.32 million people in employment. That suggests UK adspend supports around 800,000 jobs (2.5% of the workforce). So for every £1 million of adspend cut, we can expect 25 people to lose their job.

Advertising creates and sustains jobs, makes money flow in the economy through regular buying and selling of goods and services, and subsidises media and entertainment services. None of these are things we should want to reduce during a period of economic uncertainty.

# Alex Steer (17/09/2022)