Thought Leaders II
A Time to Harvest: This Could Be the Time to Cut R&D and Marketing
At the M Planet Conference in late January, Anne Mulcahy, Chairman and CEO of Xerox Corporation, remarked that this is the time to invest in R&D. Wharton Professor of Marketing David Reibstein, also a speaker at the marketing conference in Orlando, disagrees. "If this is the time to invest in R&D, when is the time to harvest?" he asks. "Now more than ever, I would think this would be the time for harvesting."
Reibstein concedes, however, that some of resources for R&D may be cheaper in this environment, which could provide an advantage. On the other hand, to address immediate cash flow, this could be the best time for some companies to throttle back on R&D and even on marketing investments, says Reibstein, who is academic co-director of Wharton's Competitive Marketing Strategy program and on the faculty of the Essentials of Marketing program.
This is the most productive time to be spending marketing dollars if you can afford to spend. But if you can't, cutting marketing expenses will help you with your cash flow.
–David J. Reibstein, William Stewart Woodside Professor; Professor of Marketing; Academic Co-Director, Competitive Marketing Strategy
The Paradox of Investing in Brand
The same argument can be applied to investing in your brand. Reibstein says there is a paradox to investing in marketing during a downturn. On the one hand, every dollar invested in brand building in this market has more punch, given the reduction in spending by competitors. On the other hand, established brands may coast on their brand equity, and every dollar they save by cutting goes right to the bottom line.
"This is the most productive time to be spending marketing dollars if you can afford to spend. But if you can't, cutting marketing expenses will help you with cash flow," Reibstein says. "You have a greater ability to gain share right now. If you believe in notions of lifetime value of the customer, this will help you in the future. But if you can't afford to spend, cutting marketing dollars is an easy way to save."
Companies seeking to cut budgets may be able to harvest their brand equity in this period. If Coca-Cola stops spending on its brand today, customers will not stop drinking Coke and will still know the Coca-Cola brand tomorrow. "The brand is still strong, and any money cut goes right to the bottom line. We invest a lot in our brands, so this may be a time to harvest."
Companies also need to give careful consideration to where they cut their marketing budgets and how to build them back up again. "Research what you should be cutting in your marketing budget and try to assess where you could have a bigger impact," says Reibstein, who is also academic director of the Wharton Marketing Metrics™: Linking Marketing to Financial Consequences program. "Should you be spending more on acquisition versus retention?"
Since this looks like it could be an extended recession, cutting marketing spending in such areas as new customer acquisition and long-term brand building can make sense, he says. Companies need to be alert, however, to when the recession is ending so that they can step up spending in these areas before the recession is over.
Understanding Competition and Customers
Managers also have to examine the actions of competitors. "There is a big risk if you cut and your competition does not," Reibstein says. In such cases, companies may not be able to afford not to advertise.
It is also vital to understand what customers want. "This is a time when customers are going to be much more hesitant to buy. Given this hesitation, it becomes all the more essential to figure out what the customer wants. You need to get it right, and get it closer to right than the competition is doing. In today's economy, customers are going to be scrutinizing the choices they have."
If companies do launch new products, they should consider launching them as brand extensions rather than creating new brands. "Lots of companies launch products under new brand names, but it takes lots of money to create a new brand," he says. "My inclination would be to use existing brands, and gain increased awareness."
For new companies, or companies launching a new brand, the less cluttered market makes it easier for them to gain visibility. But the current market conditions also make it harder for a new product or brand to succeed. "Certainly high-end products might have a very tough time in this environment, while necessary or essential goods such as food might have a better chance of gaining traction," Reibstein says.
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