What risks can a reduction in marketing budget pose for companies?

Marta Mackeviča, Managing Director of communication agency “Miltton Latvia”

In the first months of this year, companies from various industries continue to operate under growing raw material and energy costs – last week fuel prices increased in Riga, and in February the average electricity price in Latvia (and also in Estonia) increased by 14%. A number of companies are still strongly affected by the more than a year-long war in Ukraine – they have had to look for new suppliers and collaboration partners for raw materials, which has significantly increased their cost positions. It is logical that in such a situation the question arises – where and how to save, which costs to reduce? Many understand that in the current high inflationary conditions, there can be no talk of reducing employee salaries or bonuses, so one of the areas where the opportunity to save is often sought is marketing. However, there are several aspects as to why such a short-term cost reduction can create much greater challenges and losses in the future.

Explaining decisions to consumers and partners

When thinking about the aspects of whether to reduce or not reduce the marketing budget, it is important to take into account not only advertising activities and their costs, but also market analysis, competitor research (which is especially crucial in crisis situations), direct communication with customers and collaboration partners, communicating about the challenges the company is currently facing, assessing their loyalty, and so on. Raw materials remain more expensive, and the company is forced to raise product or service prices – is it better to reduce the marketing budget, leaving room for discussions, or whether to adjust marketing activities to explain the situation and maintain consumers and collaboration partners (and also the company’s reputation)?

Will existing customers really be enough?

If a company significantly reduces its marketing budget, it does not only mean fewer opportunities to acquire new customers. “We will be fine with existing customers, we won’t look for new ones for now” – definitely not the best approach, especially in the current economic conditions. It should be borne in mind that price increases also affect each of the existing customers, so unless your cooperation is secured by an ironclad contract with significant penalties for breach, existing customers should not be perceived as set in stone (nor should they be in the case of such a contract). Reducing the marketing budget will undoubtedly also affect cooperation with existing partners and customers (their return), encouraging them to suspect the company’s stability and how important customer and partner loyalty is or is not. Some well-known truths that can happen to a company when reducing its marketing budget – competitors can take advantage of the opportunity and overtake, rumours about problems in the company may start (to dispel them, crisis communication tools may have to be used, which would create new costs), customer loyalty to the brand may decrease, etc.

Helping your customers maintain loyalty

As inflation and energy costs rise, many consumers are trying to reduce their expenses by evaluating whether to remain loyal to a particular brand, seek cheaper alternatives, or even give up the product or service altogether if possible. By reducing marketing activities, a company essentially makes it easier for the consumer to choose to end the relationship. Furthermore, if the consumer perceives that brand loyalty is not important to the particular brand, it can also negatively impact their desire to return to the brand in the future, even as their purchasing power improves.

Not to reduce, but to adjust the marketing budget

In a challenging economic situation, it is not advisable to completely reduce the marketing budget if possible. Although this desire is completely understandable, especially if the business owner needs to pay employee salaries, it is crucial not to completely stop marketing activities. However, this does not mean that you should stick to the marketing plan, especially if it was created before the economic changes. Marketing activities should adapt to the situation, and the budget can be redistributed by deciding which tools are more important in the particular situation, which ones can be postponed, etc. Fortunately, marketing is a flexible and constantly evolving field that can adapt if given the opportunity. Marketing is powerful and it shows the difference between an outdated brand and a brand that wants to grow and cares about its customers. Whether you use advertising tools, create advisory blogs, implement direct communication with customers and partners, or do something else, it is also important to not forget this statement during challenging times.