“We are navigating uncertain times.” How often have you heard some variation of this phrase in the last three years? It’s been used to explain everything from layoffs to schedule changes to service disruptions, and — while it may be true — it’s getting exhausting. I think it’s fair to say that we’re all looking for more “certain times.”
Perhaps more certainty and predictability lie in the future, but they remain to be seen. Right now, everyone (especially those in marketing) needs to focus on navigating uncertainty.
Adjust Investment Strategies for Uncertain Times
In the past year, we have seen the tide shift from a general policy of “grow at all costs” to “show profitability.” This means that companies’ investment strategy needs to focus on protecting the bottom line, and if the correction is not done gradually over time, the marketing budget is the most exposed to cuts and pullbacks.
This is usually because of two reasons:
- A structural adjustment like laying off part of your staff comes with expensive severance packages and therefore requires time to show an impact on the bottom line.
- Because companies that need to prioritize revenue and profits in the short term are often willing to forgo a medium to long-term impact for immediate relief, favoring sales costs that can bring immediate revenue vs. marketing expenditures that bring both short, medium, and long-term benefits.
This is the reason why companies that are seeing a softening demand (i.e., topline decline) or are anticipating a market contraction, tend to cut media and marketing budgets before reducing sales costs.
The problem is that if this pullback is done too abruptly, inbound demand will soften to the point where your sales efforts become less effective and will therefore worsen the company’s need to cut costs to maintain margins. Moreover, if your disinvestment strategy is more drastic than your competitors, the market share loss will make a later recovery 2-3x more expensive than the initial savings.
At this point, people may be tempted to suggest that to prevent this tricky situation, companies should have been more conservative in bolstering costs during a growth period. Still, we need to remember that limiting spend in a moment of growth also presents the opportunity cost of losing “fair” market share with respect to the market and competition.
Since we can’t go back in time, let’s discuss how companies can navigate a worsening financial outlook and how marketing and finance departments can partner together to adjust their investment strategy to manage the current environment.
Pulling Back At The Right Time
When a recession looms, it can feel intuitive to put a conservative spending strategy into place. However, this isn’t always the best course of action.
First of all, we don’t actually know what the next few months will look like. Financial analysts broadly agree we’ll see a second dip to a “double-dip” recession sometime in 2023, but there is considerable debate over just how it might play out.
Will we have a “soft landing” where growth slows and plateaus without officially plunging into a recession? If a recession does hit, will it happen as early as spring 2023? Will it hold off until as late as spring 2024? The most recent US inflation data seem to indicate a improvement of the macroeconomic situation.
Once again, we’re awash in uncertainty. We want to behave as if we know what will happen, but we simply do not.
Secondly, even a solid guarantee or a recession would not accurately predict its impact on each sector. Tech is facing an uphill battle at the moment. Large companies that expanded their workforce during the pandemic are announcing layoffs, and these shockwaves are rightfully hitting the headlines. However, not all sectors are showing such a grim outlook, and it’s important not to let the legitimate concerns of one industry overshadow the reality of another.
Building off these concepts, it’s clear that companies that are not showing signals of softening should not overcorrect for what it may be, but have in place a flexible investment strategy that gives them room to pivot, while also giving the impression to investors that they’re safely situated in case of a worsening environment.
The Difficult Art Of Predicting The Future: Facing a Two-Fold Problem
This investment strategy is easier said than done. A two-fold problem stands in the way:
- It’s easier to control spending in advance. Releasing more budget down the line if the outlook looks better than expected is often easier than cutting if the outlook takes a turn for the worse. Pouring more resources into marketing on an upswing feels more controlled and positive than slashing them when morale is already low.
- Publicly controlled companies will be rewarded for financial constraints. The stock market will provide rewards for publicly controlled companies that practice a conservative strategy.
In my view, the second problem is the more important one. Many are aware that in a moment of contraction, it’s advisable to invest ahead of the competition to gain market share, and companies may decide to make a strategic investment.
At the same time, CFOs have a balance sheet to maintain. When topline revenue decreases, increasing or even just continuing spending only means reducing your margins. The financial community would see such a move as irresponsible, likely “punishing” the company by selling off stock and decreasing its price.
CEOs and CFOs are acutely aware of the careful balance they must strike. Often, they’ll come to the conclusion that a decrease in stock price is more harmful than a loss in market share, especially for companies that heavily rely on debt.
A Structural Problem for Public Companies
We’ve gotten to the heart of an important matter for public companies: there is a structural issue.
First, it’s incredibly hard to estimate the long-term impact of suboptimal marketing investments (e.g. Branding). You can’t know what would have happened if you had taken a path you didn’t take. It’s much easier to calculate the financial impact of a stock price decline on your cost of capital. The ease in calculation makes the loss feel more “real,” but both impacts are equally substantial. One is just harder to solidly envision.
Because of this mismatch in perceived certainty, analysis becomes lopsided, biasing executives to protect something tangible (stock price and cost of debt) over something less tangible (brand equity and market share changes).
Secondly, the largest companies in the world are bound to the stock market, a suboptimal system that overvalues the short-term and cannot correctly price long-term strategic investments.
This forces these large and powerful companies to make suboptimal management decisions to avoid excessive deterioration of their financial status, hindering their long-term growth.
The worst part is these conditions create a self-fulfilling prophecy with respect to a potential recession. We’re not yet in a situation that requires drastic measures, but the efforts to get ahead of a predicted collapse push them to reduce spending. In turn, they create a waterfall effect on the broader economy, likely leading to a macro-contraction.
This may sound grim, but I firmly believe that in moments like these, a strong partnership between the CFO and CMO of any company can help craft a narrative that can appeal to investors during earnings calls, giving everyone enough runway to manage the short-term without compromising the medium to long-term horizon.
What is the Best Way Forward?
For better or worse, this is not my first time navigating a global financial crisis in a tech company. When I was working at Google during the 2008 financial crisis, I remember Eric Smith and Larry Page providing two guiding principles that are still valid for navigating today’s economic turmoil:
- “Scarcity brings clarity.”
- “It’s important to put ‘more wood behind fewer arrows.’”
In other words, they focused on prioritizing the company’s strengths and focusing on them. That focus included funneling resources (even as they became more limited) behind those core priorities.
Granted, the circumstances of 2008 are different from our current financial realities (especially for tech companies). However, the central themes of the approach haven’t changed.
In this uncertain moment, any company that wants to make it through intact needs to take a hard look at what’s necessary to bring the business forward. They must identify strategic opportunities that will be “unregrettable bets.”
Make Unregrettable Bets
An unregrettable bet is a strategic move equally driven by data and conviction. It can be as simple as doubling down on customer acquisition because the company’s existing customer base is overly distributed in a declining sector, or it can be as risky as Meta’s bet on VR. Only history will tell if they were right to take such a bet, but it will drive focus and clarity to the organization, possibly driving the company out of a spiraling trend.
Making an unregrettable bet will inevitably bring uncertainty and some short-term pain that will show up in stock prices because the investment community will be divided between the “believers” and “non-believers.” If correct, however, they can transform the market faith in the company and give it an incredible advantage.
Having grown up in a coastal town in Italy, sailing competitively for most of my youth, I find this passage from Shakespeare’s Coriolanus to ring particularly true in moments like this: “When the sea was calm, all ships alike showed mastership in floating.”
We must consider the importance of being resolute in any strategic move. Once the executive team has agreed on a strategy to go forward that’s primed for hard times, they need to accept a moderate-to-high degree of risk.
Many companies make the mistake of attempting to “hedge their bets” by not committing enough to their strategy. This approach may look good on a spreadsheet, but it weakens their position as market leaders.
I believe it’s much better to have a clear strategy with credible investment behind it, than to have a financially responsible P&L and no real commitment to a way out of the current situation than just to weather the storm.
When we remember to “put more wood behind fewer arrows,” we’re committing to re-focusing, not only cutting costs.
We cannot expect certainty in our corporate investment strategy when we admit we’re in “uncertain times.” We must rise to the occasion around us.
Make unregrettable bets. Be resolute.
Bringing it Back to Marketing and Media
We’ve been discussing some big guiding principles about how companies navigate uncertain times, so let’s take a moment to distill those principles down. How does this connect back to marketing and media?
Marketing can be an engine of growth for any company, but if we accept that generous depiction of our potential, we must also accept the burden that accompanies it. We need to show up in a way that is as buttoned down and responsible as our finance colleagues (and the stock market) need us to be, fully understanding the context of the budgetary decisions that need to be made.
In this article, Peter Weinberg & Jon Lombardo do a great job of explaining why branding efforts should actually be protected in a downturn at the expense of new creative production and more direct-response tactics (especially in B2B but it easily applies to B2C as well).
Similarly, paid media is often the larger and more immediate lever to pull to fuel demand or save costs, and therefore each professional in this space has the responsibility to be extremely thoughtful in their approach. They need to walk the line between not being defensive about the budget but also making structured arguments to support their beliefs in the best way forward.
That means building and managing our campaigns in the same way we would manage our corporate strategy:
- Build a clear strategy with unambiguous parameters for success.
- Laser focus efforts that deliver on the strategy.
- Ruthlessly divest (or postpone investment) in anything not critical to the current goal.
- Perform agile execution and be ready to pivot.
Above all, be very public and vocal about the company’s strategy. A cohesive and straightforward narrative on why you’re taking a strategic bet will provide confidence and a sense of stability. Repeat this narrative internally, with company business partners, and even on earnings calls.
Creating the space for a successful execution
This is where the relationship between the CMO and CFO becomes most critical. It’s not just a clear strategy and a good narrative that will carry you through. It’s also about making space in the budget to actually take those bets
The finance team must take control and work alongside its marketing counterpart to build a plan that balances executing the plan for long-term success and managing short-term financial risk. Agree from the beginning on the metrics for success and what to expect in the following weeks and quarters. Know what you will label success and what thresholds will trigger a pivot.
While I was researching material for this article, I found this 2014 LinkedIn post from Ryan Roslansky reminding people that “the true measure of your character is how you react and operate when the seas aren’t calm.”
Navigating uncertain times is never easy, but committing to a strategy, being vocal about it, and partnering closely cross-functionally will maximize your chances of reversing the cycle and getting in control of the situation. We can’t control what happens around us, but we can always choose how to react to it.