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Cost-cutting is a ‘coping’ strategy — but it is no substitute for effective marketing

cost cutting

Michael Farmer is the author of Madison Avenue Manslaughter: an inside view of fee-cutting clients, profit-hungry owners and declining ad agencies (Third Edition, 2019), which won four publishers’ awards for excellence in marketing and advertising. Farmer is the Executive Chairman of TrinityP3 USA. He also serves as Professor of Branding and Integrated Communications at The City College of New York (CCNY).

Ever since the financial crisis of 2008, advertisers and agencies have been ‘coping’ with revenue stagnation. Despite the massive availability of media alternatives and the promise of targeted digital advertising, brands and revenue have languished. Nevertheless, the need to maintain share price growth has never ceased — that’s how C-Suite executives earn their bonuses. This explains their obsession with corporate cost-cutting, which has become a de facto substitute for effective marketing. It’s an unfortunate outcome.

Coping is a temporary response to life’s crises. Widows and widowers say “I’m coping” during the first year of their loss, but we’d be surprised to hear this from them ten years on.

However, advertisers are still ‘coping,’ for more than a decade, with their inability to grow the top line. Advertisers have experimented in many ways, fragmenting their media spend and significantly increasing the volume of deliverables in their creative scopes of work — and, to top it off, changing their media and creative agencies every few years — but thus far, revenue results have been poor.

Instead, cost-reductions and other efforts, like acquisitions and portfolio pruning, have satisfied Wall Street for the past decade, and share price growth has uniformly exceeded revenue growth by a wide margin.

Advertiser Performance

A sample of 25 major advertisers from the Top 100 advertisers shows the phenomenon.

 

Data Source: https://www.macrotrends.net/. Analysis by TrinityP3 USA.

 

Share prices are largely driven by expectations about the future, and as long as Wall Street believes that the future will be better than the present, share price performance will exceed revenue performance.

For how long, though, can advertisers rely on cost reductions, financial engineering and portfolio fixes to shore up share prices?

At what point in the future will advertisers be punished for the poor results from their marketing programs? “Fake it until you make it” might have been OK for Chief Marketing Officers during the early years of digital and social media, but as time goes on, their CEOs and Wall Street will need greater assurance that the significant investment in media generates actual growth in revenue, not just growth in clicks.

Holding Company Performance

Holding companies, like advertisers, have responded to the post-2008 period with cost reductions, downsizings and juniorisation of their staffs — their way of ‘coping’ with client fee cuts and the need to shore up holding company share prices. Holding companies were able to grow their share prices with this strategy, but recent evidence shows that Wall Street is less confident about the holding company future than it was in the past — average holding company share prices have declined from previous highs, and this was before COVID completely disrupted holding company performance.

Shown below are WPP, IPG and Omnicom combined results, with revenues and share prices indexed at 100 in 2009. Holding company results stand in stark contrast to the performance of advertisers, shown above in a similar graph.

Data Source: https://www.macrotrends.net/. Analysis by TrinityP3 USA.

 

It should be obvious from the foregoing that Procurement has been delivering near-term value for advertisers. Marketing’s performance has been questionable.

For the future, Marketing and Procurement need to change priorities. Future performance improvements must come from Marketing, which needs to master its complex media mix, while Procurement should focus on client-agency process improvements, not just costs. The cost-reduction game will run out of steam in any case.

Agencies should be re-engaged as strategic partners to help clients solve brand performance problems. The practice of turning agencies into commodity suppliers of low-cost services has been an unmitigated disaster for everyone.

‘Coping’ with the 2008 financial crisis through cost reductions needs to cease. Cost reduction was meant to be a temporary fix, not a long-term strategy. It’s time to become ‘strategic’ and focus less on tactical thinking.

Photo credit: Dana Fradon, The New Yorker, The Cartoon Bank. With permission

This article first appeared in Media Village on September 21, 2020

TrinityP3 has developed a suite of solutions and services proven to increase your marketing performance, in both efficiency and effectiveness, to achieve improved business outcomes. Find out more here.

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Michael Farmer is Chairman of TrinityP3 USA and author of Madison Avenue Manslaughter: an inside view of fee-cutting clients, profit-hungry owners and declining ad agencies, which won the Axiom Gold Business Book Award for the best marketing / advertising book of 2016. He currently serves as Adjunct Associate Professor of Branding and Integrated Communications at The City College of New York (CCNY) and is at work on a new book about the challenges facing Chief Marketing Officers.

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