In July, the International Monetary Fund highlighted a significant slowdown in the world’s top economies and labeled its outlook “Gloomy and More Uncertain” in regards to another recession only two years after the last one. The war in Ukraine, rising inflation rates, tighter monetary policies, Covid outbreaks, real estate crises and other challenges confine global economic growth and ultimately threaten the advertising industry.
With uncertainties on the rise, marketers are seeking the right balance to weather an anticipated advertising downturn while keeping their businesses profitable. There’s no clear view on how big the changes might be or how exactly media companies should react.
Will advertising fall into recession?
Short answer: We don’t know. Journalists tend to warn readers by referring to the Great Recession that happened between 2007 and 2009, when the U.S. local and national segments of advertising fell by 21% and 14%, respectively. Current inflation rates (8.5% in June 2022 in the U.S.) and commodities supply chain disruptions obviously can’t inspire the industry’s confidence.
Big tech companies produce worrying signals as well. In May 2022, Snapchat’s CEO, Evan Spiegel, warned company investors of a slowdown in revenue growth. That, among other things, has dropped Snap’s stock. Such declines are often viewed as the first signs of an upcoming ad sales crisis and bad news for the economy in general.
What we also have to keep in mind is the real business-cycle theory that roughly outlines the intervals between economic expansion and economic recession in a 10-year period. And it has been well over 10 years since the last major economic downturn. While predicted to be mild, some economic experts bet there’s a 25% chance for a recession within a year. Goldman Sachs estimates that risk at 35% (paywall) in the next two years.
This predicted stagnation sets major agency holding companies to forecast market spending slowdowns in the second half of 2022 and in 2023. According to a VAB report based on metrics from Dentsu, GroupM, Magna and Zenith, 2022 ad spend growth in the U.S. has decelerated from 20% in 2021 to 12% and may slow down to 5% in 2023.
Should companies advertise less during a recession?
Based on data from the most recent major economic recessions, including studies by the IPA in their Advertising in a downturn publication as well as those by McKinsey & Company, (paywall) Pennsylvania State University and VAB, all say that brands should keep on advertising. The higher the marketing share of your brand and voice, the bigger the market share is going to be. That means that cutting marketing budgets during a recession, despite providing temporary financial relief, can bring a significant decline in mid-to-long terms.
Another point against cutting budgets relates to the advertising lag phenomenon. Advertising’s anticipated effects do not always coincide with a campaign’s release, and sometimes you just have to wait. Not only does the advertising lag impact priming in the long run, but it also creates a lucrative opportunity to gain a share of voice at a lower price during a recession. There are strategies you can use to increase sales during a recession that I would like to share with you.
Aim for long-term brand building over short-term activations.
The IPA’s Long and the Short of It (paywall) comes to the conclusion that the most effective advertising campaigns spend about 60% of their marketing budget on brand-building advertising and 40% on short-term activations. Though this ratio may be revised during normal times and/or depending on the type of product, my recommendation here would be to keep the highlighted balance during uncertain times for maximum business effectiveness.
Adjust the tone of advertising.
During any recession or any other significant crises in general, it can help to switch to a warmer and more emotional tone. The shift towards more serious approaches and logic-driven content seen in 2008 did fit the mood of that time. However, IPA case studies suggest that campaigns based on “feel-good” emotions proved more effective, especially the ones highlighting what the brands did for their customers. IPA’s 2010 T-Mobile case study (paywall) shows that bringing basic human values to the fore with warmth and good humor can help a company to run a successful ad campaign during the recession.
Diversify customers and verticals as much as you can.
In digital marketing, it’s vital not to put all your eggs in one basket. Generally, in business, if you have a broad customer base support and an expansive list of partnering publishers/advertisers, a sudden collapse of any of the links in a chain due will not significantly disrupt you.
The same goes for advertising verticals. Some of them are sensitive to economic disruptions, and some of them are more insulated from the impacts of a recession. For instance, dating and social networking can be considered evergreen verticals, while automotive and most luxurious verticals tend to suffer more greatly during economic downturns. One way or another, working with multiple verticals is safer than sticking to a single field.
• A significant slowdown in the world’s top economies, growing inflation rates and supply chain disruptions threaten to damage the advertising industry. There’s no clear view on how big the changes might be and how exactly media companies should react as anticipations are mixed among industry professionals.
• Because of economic concerns and predicted stagnation, marketer spending is forecasted to slow down in the second half of 2022 into 2023.
• The lessons marketers took from the most recent major economic recessions suggest that businesses should not decrease their budgets unless it is a question of their survival.
• Marketers should target long-term brand building rather than short-term activations in case of a recession.
• Adjusting ad tone, diversifying customers and pivoting to new verticals are universal tips for digital advertising facing a potential downturn.
The conclusion is simple. Recent major economic recessions prove that cutting advertising budgets during a recession, despite providing temporary financial relief, can lead to a significant decline in long-term sales.
by Dmitry Atamanyuk