Exhibit A: marketing professor Ronald W. Stampfl of San Diego State University's College of Business Administration, and his column in this week's Ad Age, "Why Now Is Not the Time to Cut Costs."
Here's his central thesis:
... cost cutting is a worthy goal when it comes to business operating expenses, but cutting the marketing/advertising budget frequently hurts an organization's ability to finance research and development of new products and create or stimulate demand for all products in future fiscal periods.His prime example is General Motors, which he hints might have avoided bankruptcy had it only kept its ad budget high enough:
The experience of General Motors provides an excellent example of the need to match problems to solutions that will work. President Barack Obama was insightful when he insisted that Rick Wagoner be replaced as CEO of General Motors before any bailout funds were offered to GM. Mr. Wagoner had spent several years trying to make GM profitable by reducing costs at every opportunity, including huge cuts in the marketing and advertising budget. That strategy clearly did not work ...Stampfl is wrong, and his wrongness illustrates one of the central fictions of the biz: the idea that you can advertise your way out of anything, even reality. I'm no fan of GM's Wagoner, but let's walk in his shoes from March 2008 to March 2009, the point immediately before the company capitulated and filed for bankruptcy.
This graphic is taken directly from the last quarterly earnings report the "old" GM ever filed (click to enlarge). We can see that car sales were down 47 percent from $42 billion in 2008 to just $22 billion in 2009. Manufacturing expenses (under "cost of sales") were cut 23 percent to $25 billion. And marketing costs (under "sales, general and administrative expense"), were cut 32 percent.
Applying Stampfl's logic, we can conclude that a reduction in GM's marketing -- of nearly $1.2 billion -- did indeed appear to precipitate a decline in GM's sales.
But this, of course, is a deliberate misreading of the facts. Between spring 2008 and 2009, the economy plunged into a fierce recession. People were losing their jobs left and right; they couldn't sell their homes to tide themselves over because the recession started in real estate; and their 401(k)'s were decimated also. The idea that this was a car-seller's market waiting to be properly tapped is pure fantasy.
But don't judge Stampfl's argument on the history, judge it on the math. Note that sales at GM declined at a faster percentage rate than Wagoner cut costs. In 2008, GM earned $11.34 cents in sales for every dollar it spent on marketing, but by 2009 it only made $8.90 on the same investment.
In other words, it was not that Wagoner abandoned the pump that was priming the market (as Stampfl says), but rather that Wagoner's pump was becoming increasingly ineffective as time went by. On the numbers alone, Wagoner actually kept the marketing costs far higher than they should have been had he been managing his margins. Despite those proportionately higher investments, GM's sales declined even faster and its net loss widened from $3.2 billion to $5.9 billion.
The remainder of Stampfl's column consists of anecdotes about Kohl's and Carl's Jr., who have apparently run effective promotions that have driven demand. Fine. Accepted. If, that is, you're selling items that cost under $100. Everyone else in charge of a marketing budget might want to ask whether consumers who lived through this recession will ever again be in the mood for a Hummer, and whether it would even be a good thing to reintroduce such a nonsensically bloated product in the first place.