Arbitary cost cutting is dangerous


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The covid-19 pandemic is having a serious effect on commercial activity across the world, producing a state of economic recession. Many businesses are seeing their income fall, while their costs remain. Demand is still there, but government enforced shut-downs and social distancing has resulted in buying decisions being deferred so that sales income is greatly reduced, or non-existent. At the same time, costs remain and may even go up. The result is that profits are reduced or non-existent and losses increase. To survive these extra-ordinary times, and the inevitable losses, businesses will have to reduce costs as far as possible, relying on any limited income they can produce and their reserves to see them through this situation.

“Marketing” is the management process that encompasses all those activities which produce sustainable profitable income by anticipating and satisfying customer demand. The responsibility of getting and retaining business, to produce the necessary profitable revenue, lies with the commercial manager. Getting and retaining business costs money, but when profits are squeezed, there is always a pressure to cut costs, and then the budget for marketing is often one of the earliest targets. This is because chief executive officers and their financial chiefs, often do not have a full understanding of what is involved in getting and retaining business, and unfortunately, too many marketers still do not provide quantifiable evidence that defines their contribution to revenue generation.

If reduced income is causing cash flow problems, then cutting expenditure in the short term may be necessary if the business is to survive. However, if reducing expenditure is considered necessary, then being selective about what to cut and by how much, will be essential for the long term future of the business. If the commercial manager cannot demonstrably justify the level of expenditure in the budget for marketing, then cuts in expenditure may have to be made.

Before making any cuts, the commercial manager needs to know how much it actually costs to get and retain business. This question is fundamental to understanding the true scale of the marketing budget, and how the various investments and costs contribute to the production of profitable revenue. No business can succeed simply by cutting expenditure. Businesses have to produce income in order to survive, but producing income cannot be done for nothing. At the same time, businesses cannot survive indefinitely if costs continue to exceed income. So if cuts are essential for short-term expediency and business survival, the following must be considered.

* The objectives for making budgetary cuts must be defined in order to achieve the target reductions in marketing costs.

* There needs to be a cost/benefit analysis of all the options available for reducing costs, especially regarding potential unforeseen consequences.

* Decisions must be made on those actions that will least damage the business’s ability to compete successfully in both the short and long term.

It is important not to cut everything proportionately across the marketing budget, as this tends to magnify hidden weaknesses while diminishing strengths.

If the business is to survive over the long term, then it is important to evaluate the expected return on each area of investment and continue to invest in those offering the most attractive returns, while cutting the rest. Consideration must be given to the relative importance of particular customer segments, product groups, and geographic areas, in producing income. Similarly, not all customers, products or areas are of equal value in their production of income. Each should be evaluated and ranked from highest to lowest, according to their expected return on investment, making cuts in the lowest performing ranks. The principle should be to starve weak projects and to feed strong ones.

The impact of cost reduction decisions depends in part on the actions of competitors.
By cutting expenditure in step with its competitors, a business may still achieve as much as previously, but on a lower budget. But supposing the competition cut less, or actually increases spending? Exploring such possibilities, with analysis of the possible cause and effect will help illuminate the level of competitive risk involved in making cuts to the marketing budget.

While considering cutting some parts of the marketing budget for economic reasons, it may also be advantageous to increase spending in other parts, in order to compete more effectively. Investing more in customer relations may be necessary to maintain customer retention. More investment may be needed in marketing research in order to fully understand the change requirements of customers who are also affected by the recession. Is the customer being given a relevant message via a media suitable for the recipient? If not, additional investment may be necessary.

In a recession, the first expenditure cuts usually come from the advertising budget. While this may be relatively easy and helpful in the short term if there are problems with the cash flow, it may easily be a false economy, especially when considering the long-term future of the business. Research conducted by McGraw-Hill into the recessions in the U.S. from 1980-1985, showed that out of the 600 business-to-business companies analyzed, the ones who continued to advertise during the 1981-1982 recession hit a 256-percent growth by 1985 over their competitors that eliminated or decreased spending.

Cutting the marketing budget, without a full understanding of the implications is dangerous.
Reducing the financial costs in the immediate short-term, without carefully considering the implications, may dangerously compromise the ability to produce the necessary income for the long-term future of the business.

Nicholas Watkis, AE MA DipM CMC FCIM
Nicholas Watkis set up Contract Marketing Service in 1981, providing professional interim marketing management for a wide variety of businesses. Over 30 years practical experience in organizations, large and small, national and international, led to the development of Business Performance Maximized specialist in marketing performance measurement.


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