When Should You Increase Advertising Spend?

You may get a bigger payoff from increased spending on advertising if you wait until the economy begins to contract, says new research. That doesn't mean advertising in a healthy economy is a waste of money. But when advertising spending is already high, there's a risk of "overspending," says the study. Too much advertising may help rivals by increasing a buyer's awareness of a category and not your company's brand!

Conventional wisdom was right

To examine the long-term return from advertising, researchers analyzed the performance of nearly 2,700 companies — and grouped them by type (consumer, industrial and service). They then compared returns from advertising in recessions and upturns. They found advertising was an asset that contributed to a company's financial performance for up to three years. And increased spending during a recession produced greater benefits than increased spending when the economy was doing well.

One reason for this outcome: Advertising sends a positive signal about future performance to investors. It works in much the same way that exhibiting at a trade show during hard times may inspire confidence in customers and sales partners.

What this means

If increasing advertising pays during a recession, what's the impact of budget cuts? You may lose momentum, but it's not fatal, finds the researchers. Here's why. Past advertising has a cumulative effect that can help you maintain your position for three years. But to get the biggest bang for your buck, they urge companies to maintain spending at a steady pace.

The researchers also found that not all companies are equal. Advertising spending had a bigger impact on consumer and industrial products than it did on service companies.

Source: "Should Firms Increase Advertising Expenditures During Recessions?" MSI Report, No. 03-115.