Acquiring Customers in a Recession: Market Smarter Not Less

While it’s still not clear whether we’ve escaped a recession, and only the revised economic figures will tell after the event, and with many black clouds still on the horizon from huge post pandemic debt burdens to wars and trade disruption in the background, it’s only normal for marketers to question what impact this could have on marketing budgets. 

Of course, the marketers’ union would argue you should never cut marketing budgets, because marketing is the source of future sales and growth, and reducing spend now will only harm the future. But the reality is that it’s exactly because marketing is seen as spend today for jam tomorrow, that it’s viewed as expendable. After all, when other departments are having budgets cut, headcount reduced and the end of year party cancelled, why should marketing escape the pain? And when the company is looking at day to day survival, projects that bear fruit in the future will always be vulnerable. 

And so, if your marketing budget is going to be under pressure, we think that instead of reducing marketing, you should be smarter with the marketing you do and look to leverage the marketing spend you’ve already made rather than just looking to spend more. 

We’ll go into this below, but first let’s look at the arguments for not cutting marketing spend. 

The arguments for not cutting marketing spend

We fully expect that CMOs will put up a fight and argue that marketing should be spared. After all, show me the marketer who happily accepts a reduced marketing budget and I’ll introduce you to the turkey who just voted for an early Christmas. 

And there is evidence to show that maintaining or even, dare we say it, upping spend in a downturn can make sense. 

• A much cited McGraw-Hill Research ‘Laboratory of Advertising Performance Report’ from 1986 looked at 600 companies and showed that those that maintained or increased their advertising spend during the 1981 recession had sales by 1985 that were 256 per cent higher than those that didn’t.
• In May 2008 a Milward Brown paper titled “Marketing During Recession: Survival Tactics” argued that ‘companies that increase their share of voice when others are cutting back have an opportunity to substantially improve the standing of their brands’. The paper advocated trading down to less expensive media and focusing on  creating high-quality creative, as good creative was found to have five times as much impact on profit as budget allocation. 
• And when other advertisers cut back spending, those still spending can benefit from reduced CPCs and CPMs due to less competitive bidding, as Wordstream noted that average CPCs dropped during Covid and reportedly Facebook’s CPMs dropped 15-20%. There’s also an argument that your message is more likely to cut through if there’s less noise out there from other marketers. And, of course, by continuing to advertise, you remind your customers that you’re still here and are trustworthy and durable. And an IPA (The Institute of Practitioners in Advertising) study in 2008 reported that  “A brand judged to be on the way down, because it has fallen silent, will very rapidly see this manifested in word-of-mouth, which will accelerate the perception of failure.”

But while these are all fine arguments, let’s face reality. In a downturn, your marketing budgets are likely going to be cut. The question is how will you adapt. 

Leveraging Your Past Marketing Budget 

Now if you turned off all your marketing today, your business shouldn’t (at least we hope it shouldn’t) grind to an immediate halt. That’s because your past marketing efforts should have created a brand awareness that will continue to drive sales into the future. 

In this respect, the 2008 IPA study also reported that:

“Following a budget cut, a brand will continue to benefit from the marketing investment made over the previous few years.”

But as the study continued, these effects will be short term and are likely to cause long term problems:

“This will mitigate any short-term business effects, and will result in a dangerously misleading increase in short-term profitability. The longer-term business harm will be more considerable, but will not be noticed at first.” 

In other words, turning off your marketing is unlikely ever to be a good response over the long term. Instead, you need to get smarter with your marketing and leverage your past marketing budget expenditure. That’s because your past marketing efforts are not only represented by brand awareness but by living and breathing beings: your current and past customers. 

So the smart way to continue your marketing during a recession is to leverage your current and past customers to get them to bring you new ones. It’s about getting more out of your sunk marketing costs rather than only thinking about new spending to acquire new customers. This is called word of mouth marketing and its components are referrals, ratings and reviews, user generated content and social media. 

But as well as leveraging your existing happy customers to bring you new ones, it also means keeping your existing customers longer and upselling to them. Depending on which study you believe, the Harvard Business Review reported that acquiring a new customer is anything from five to 25 times more expensive than retaining an existing one, and research from Frederick Reichheld of Bain & Company showed that increasing customer retention rates by 5% increases profits by 25% to 95%. Which shows the value of recognizing and rewarding your existing customers to increase lifetime customer value. 

“Because are ROI is so tightly controlled and because it’s coming through word of mouth, [referrals is] a bit more resilient across market conditions.”
Natasha Saviuk, Growth Director- Wealthsimple

Ditch your addiction to paid search and paid social 

You may wonder where you’ll find the money in your reduced marketing budget for this to pay for referral marketing software and rewards. The answer is simple. By ditching your addiction to paid search and paid social you can free up money from your performance marketing budget and invest this in marketing that is both more effective and cost effective.

Leaving aside growing evidence that much digital marketing may not even be effective, there are two great case studies of how two leading brands greatly reduced spend on performance marketing and greatly improved their results by combining brand marketing with word of mouth marketing tactics like referrals.

Firstly, Airbnb reacted to the existential challenge posed by Covid 19 to the global travel accommodation industry when the borders closed and travel stopped, by cutting its marketing spend by 28%, primarily by slashing its investment in performance marketing. Instead the brand doubled down on brand marketing and Organic Discovery, creating the conditions for word of mouth to spread and capturing that via its referral program. As a result, by the time of its IPO in 2020, it announced that it got 91% of all traffic from direct and unpaid channels. And happily this marketing mix continues today according to founder and CEO, Brian Chesky.

And Gousto, the leading UK meal kit retailer announced how, after finding a ceiling to the growth they could achieve from performance marketing, decided to switch towards a brand marketing focus. As a result, they were able to change from a position in 2018, where 80% of all customers came via performance marketing, to one in 2021 where an amazing 82% of all new customer acquisition comes organically or through referrals. 

These are two great examples of how brands were forced to look away from their performance marketing, and once they did, they haven’t looked back. 

Hear from Natasha Saviuk, Growth Director at Wealthsimple as to why referrals are a more resilient form of customer acquisition across all market conditions.

Smarter Marketing

While you might take the view that lower prices for performance marketing could be an opportunity for you to gain market share, this would likely be throwing good money after bad. Tactics that worked in good economic times often don’t work as well, or don’t work at all in difficult economic situations. After all, there’s no point getting banners or search results in front of people in your target demographic if they no longer have money in their pockets. 

Instead, Organic Discovery and, in particular, referral marketing can be so much more effective at bringing you better customers at a lower cost than other marketing channels. In the famous research from Wharton University in 2013 found that referred in customers were 25% more profitable and 18% less likely to churn than customers from other channels. Recent research from Rachel Gershon of UC San Diego and Zhenling Jiang of the University of Pennsylvania revalidated that referred-in customers are more valuable, both due to their own higher spending and the fact that they, in turn, are more likely to refer in more new customers.

In particular, research from the Keller Center for Research at Baylor University showed that the reason referral marketing brings in better customers is due to a combination of (i) passive and active matching and (ii) social enrichment. Passive matching is due to the propensity of people to socialize with people who share the same values, lifestyles etc – so a good customer is likely to know other potentially good customers. Active matching is where a customer looks through his or her network for someone who would appreciate your brand. And finally social enrichment is the result of your customer not only knowing their friends really well but also knowing your products and services. So instead of just referring T-Mobile, they can refer a particular T-Mobile plan. Or instead of just referring Vitality, they can recommend a particular life insurance plan. 

And clearly, referring friends to a love brand has become a staple consumer behavior with our Reward Revolution research finding that 95% of people had referred a brand in the past year and our Referral Codebreakers research finding that eight out of ten customers expect to be able to refer their favorite brands. 

Summary

So if you’re wondering if you’ll soon be staring down the barrel of a budget cut or looking at how to get more marketing bang for less marketing buck, reach out. We’d love to tell you more about how rewards and referral marketing can help steer your business through testing times.