Why Invest in an Incentive Program when Times are Tough? (cont.)

Research Refutes the Conventional Wisdom
While it seems counterintuitive to maintain (or increase) spend on marketing communications and other customer-facing activities during a slow economy, historical evidence has shown the overall return on such an investment to be very strong. Perhaps the most comprehensive study on the subject was conducted by the often cited Profit Impact of Marketing Strategy (PIMS) project.

The PIMS study was initiated in the 1960s at General Electric, moved to the Management Science Institute at the Harvard Business School in the early 70s and continues under the administration of the American Strategic Planning Institute (www.pimsonline.com).

One thousand firms in the PIMS database were classified according to whether they had reduced, maintained or increased their marketing spend during a recessionary period. Analysts tracking these companies found that, during the recovery period:

• firms that cut marketing spend experienced a small decrease in profit
• firms that maintained marketing experienced a small gain, and
• those that increased marketing enjoyed a substantial increase in profits.

A similar pattern was evident in terms of market share. Firms that maintained marketing levels gained market share at the expense of those that cut back; firms that increased marketing activities during the downturn made large gains in market share during the recovery.

While not every company has the economic strength to increase budgets when revenues are flagging (more power to those that do), the learning from the various studies on marketing and recessions is clear:

• The advantages of maintaining or increasing marketing efforts far outweigh the short-term benefits of reducing your spend. If you have the resources, a recessionary period can offer a terrific opportunity to lay the groundwork that will lead to major competitive gains during the recovery that
  follows—gains that could perhaps deal a deathblow to struggling competitors. Management guru Ram Charan echoes this thinking in “Managing Your Business in a Downturn”, featured in the current issue of Fortune magazine (Feb 2008). Charan sagely advises - “Sacrificing your future for a slightly more comfortable present is not worth it. If you keep building, you can come back strong.”
  
  
• If necessary, marketing budget cuts must be made with great care. If circumstances force you to reduce your marketing and communications budgets to remain profitable, do not make cuts across the board—be VERY discriminating about how you allocate your now scarce resources. Cuts that result in diminished market presence or compromise value in the eyes of your customers might exacerbate the losses suffered during the downturn and inflict further damage to results in the following recovery period. Charan agrees with employing thoughtful cost cutting as well, recommending that managers “…just say no to across-the-board cuts. By all means cut costs if it makes sense to do so, but make sure there is purpose in how you do it…the key: If you have to cut costs, don't try to be fair about it."

Putting these lessons into practice may not be as clear. What follows are Loyaltyworks’ top recommendations for bringing the resources of an incentive program to bear as you navigate through the current economic morass.

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