Preventing the Unkindest Cut: Why Now is the
Worst Time to Cut Your Marketing Budget
By Sharan Jagpal
When times get tough, companies have a knee-jerk
tendency to start slashing & burning. They lay off employees. They search
for cheaper healthcare benefits and eliminate holiday bonuses. They seek
ways to reduce overhead and extraneous costs. Sometimes this crude surgery
improves the health of the overall organization; sometimes it doesn't. But
in the thick of all the "bad economy" clear-cutting, there's one business
function that should never get the ax—and yet, it's all too often the first
That's right, says Sharan Jagpal, Ph.D. To cut back on your efforts to
market your products and services when people are already reluctant to buy
is akin to corporate suicide. "In a recession, it's harder to gain new
customers, to convince existing customers to buy more, and to win back
customers who have left," says Jagpal. "So companies often need to be
spending more money, not less. They just need to be smart about it."
It's this simple: During any period of economic hardship, there are winners
and losers. Choke your marketing efforts down to a trickle—or just as bad,
direct your dollars into the wrong channels—and you'll surely find yourself
among the latter group. Overhaul your approach to marketing and you'll be
positioned to swoop down and grab some of the customer dollars that
previously went to a competitor or even capture an untapped market.
"Consider, for example, that in a good economy the vacation and videogame
industries do not compete with each other," says Jagpal. "In a bad economy,
consumers may have no option but to forgo vacations. But to compensate for
this loss, they may reward themselves with a small, affordable purchase such
as a videogame. And that's why it's important to pay attention to shifts in
consumer spending—if you're a videogame maker, you may well benefit from a
dramatic increase in your marketing right now." Before you, the hypothetical
videogame maker, can achieve such a feat, you must first get your marketing
and finance departments working together rather than clashing against each
other. It's no secret that finance people typically wield the cost-cutting
blade—while marketing people are perceived as free-spenders who have a tough
time quantifying their ideas. Fortunately, says Jagpal, common ground does
"When these two groups stop talking at each other, when they get out of
their functional silos and start working together, they can create marketing
strategies that help an organization thrive even in the grimmest economy,"
he notes. "But that means Finance must squelch its knee-jerk reaction to cut
the marketing budget, and Marketing must learn to create metrics that
demonstrate the bottom-line impact of their ideas."
How can this be done? Jagpal offers the following insights to help you get
• "Old school" resource allocation methods are woefully inadequate. In many
companies, resource allocation decisions are based on cash flow inputs
dictated by the finance department. However, cash flows are critically
dependent on the company's marketing decisions: the price charged for a
product or service, the advertising budget for the product or service, the
channels of distribution used for selling it, and so forth.
And here’s the real problem: It's difficult to know how these marketing
decisions affect cash flow. In particular, says Jagpal, it's hard to measure
the degree of uncertainty involved when a company chooses a particular
marketing policy. Decision makers agonize over questions like:
"How can I measure the effects of my company’s marketing policies on cash
"How can I quantify the uncertainty in cash flows when my company chooses a
particular marketing strategy?"
"What are the short- and long-term effects of different marketing policies
on my company's performance?"
Clearly, such a transformation is easier said than done! There must be
fundamental changes in the mindsets of managers at all levels in the
organization and across functional areas.
• Marketing people must shine some light into the murky waters of the profit
and loss statements and balance sheets. Finance people often perceive
marketing as a bottomless pit into which money disappears. Marketing
professionals, perhaps rightly, see this perception as unfair. Still, their
indignation doesn't change the fact that they must convince others to get
behind their ideas financially, Jagpal points out. While behavioral measures
such as share of voice and product awareness are fine as subgoals, they are
simply inadequate tools upon which to base resource allocation.
"The marketing department must explicitly recognize that a whole new set of
metrics is urgently needed," he reflects. "That means marketing people can't
stay inside their silo anymore, but must reach across the aisle and
coordinate decisions with the finance department."
• To avoid strategic blunders, Marketing and Finance must work together to
measure risk and balance it against return. Let's say you're comparing two
marketing strategies, each of which requires the same dollar expenditure.
You can either 1) focus on acquiring new customers, or 2) focus on retaining
the customers you already have. Now, let's say the market-growth strategy
will, on average, produce higher average profits than the customer retention
strategy. You might assume the decision is a no-brainer, but Jagpal says
it's more complex than it first appears.
"The market-growth strategy is not necessarily superior," he insists. "Even
though, on average, this strategy will produce more profits than the
customer retention one, it is much riskier. Indeed, depending on the
magnitude of the uncertainties involved, after comparing risk and return, it
may be better to focus on the strategy with lower average profits."
So, regarding the "market growth" vs. "customer retention" question, how
should a company decide which is best? Jagpal says two steps are necessary:
1) The marketing department must provide quantitative estimates of the risk
and return of the cash flows from these two strategies, and
2)The finance department (or senior management or CEO) should determine
which strategy provides a higher return after adjusting for risk. In this
analysis, the ownership structure of the firm is critical. A publicly owned
firm should focus on market risk—i.e., the risk to stockholders after they
have diversified their holdings across firms. A privately held firm should
choose the optimal strategy based on the owner's tolerance for risk and
"Starbucks is a prime example of a company that made the mistake of focusing
on market growth at the expense of risk," notes Jagpal. "In October 2006,
the company dramatically raised its long-term store opening goal to 40,000
from its prior goal of 30,000. The stock market responded positively to this
announcement and the company"s shares closed higher by 7.6 percent that day.
But subsequently, Starbucks's share prices plunged and the company paid the
price for choosing the wrong strategy. It paid a high price for ignoring
• Involve both Marketing and Finance when designing salesforce compensation
plans. How a company pays its salespeople can have a dramatic impact on
profits. Consider a PC manufacturer like Dell that sells to two segments:
the transaction segment where customers buy once and the relationship
segment where customers make multiple purchases over time. What types of
compensation plans should the PC manufacturer use for people who sell to
To address this question, says Jagpal, the PC manufacturer should view the
effort of a salesperson who sells to the relationship segment as an
investment. Decision makers must keep in mind that the profits generated by
that salesperson are uncertain. Consequently, it is best for the
manufacturer to share both current and future profits with her. In other
words, it should pay the salesperson targeting the relationship segment a
lower base salary and a higher commission rate than a salesperson targeting
the transaction segment. Interestingly, the salesperson targeting the
relationship segment will, on average, make more money than the
"transaction" salesperson. However, her income will fluctuate more.
"Odd as it may seem, the PC manufacturer must employ different sales force
compensation plans for its salespeople who target different market segments,
even though they are selling the same products," says Jagpal. "And in order
to choose the optimal pay plan, the company must coordinate the decision
across its marketing and finance departments. Why? Because each plan has a
different effect on the firm's net risk and return after paying the
Of course, these tips barely scratch the surface of the valuable information
in Fusion for Profit. But they do illuminate the overarching truth that
inspired the book: The best marketing strategies, those that yield long-term
value, are based not on trends, anecdotal evidence, or past "success
stories" but on rigorous new scientific methods explicitly developed for
analyzing data that are often imprecise.
"What worked yesterday won’t necessarily work tomorrow," he points out. "And
what works for a large publicly held corporation won't necessarily work for
a privately owned small business. Every company is different. If you want
solid, long-term performance, you need a marketing strategy that's organic,
that's understood and agreed-upon by marketing and finance leaders, and
that's backed by state-of-the-art empirical methods.
"Fusing marketing and finance may sound daunting, but the hardest part is
making the psychological leap," adds Jagpal. "Once you’ve bought into the
idea, you’ll get excited about the possibilities. There's great opportunity
out there—yes, even in an economic downturn—and when key players work
together, your company can seize it."
About the Author:
Dr. Sharan Jagpal is an internationally recognized expert in marketing and
in other fields. He was educated at Columbia Business School and at the
London School of Economics, and regularly publishes articles in top journals
in marketing (e.g., Marketing Science) and in other disciplines including
economics and statistics (e.g., International Economic Review and Journal of
Classification). His first book, Marketing Strategy and Uncertainty, laid
the foundation for his current book Fusion for Profit. For further
information, please visit