Why cutting marketing costs may end up costing you

Businesses across the country are struggling to reevaluate and restructure costs as restrictions in response to COVID-19 severely impact their ability to stay open. As businesses have been forced to close, forced to operate at limited capacity and/or have seen a significant decrease in overall demand as consumers also reevaluate financial priorities, many employees of impacted businesses have been furloughed or laid off. This increase in unemployment, in turn, is putting further downward pressure on the economy. This financial reality of 2020, carrying into 2021, means that smaller brick and mortar businesses that have continued operations while experiencing the belt-tightening impacts of stagnated walk-in sales, increased sanitation, supplies, inventory and equipment costs, all while PPP funds run dry, are doing their best to find ways to meet rent and payroll obligations. Competing with big box stores in this environment has proved to be a herculean task for small and local businesses. Across the board, business owners are being forced to cuts costs where they can. However, when looking to save money, where can you really afford to cut? Marketing tends to be the “obvious” place to save. But is this the right call? The answer may end up surprising you. Case in Point: One of our clients operates both brick and mortar locations and an ecommerce website (we focus our marketing efforts on their ecommerce business and social media). This client is located in a major international tourist destination, so they’ve been deeply feeling the blunt of COVID-19’s economic epidemic. With sky-high rent in a desirable area of town and almost all of their in-store sales disrupted by county and state-level COVID-19 retail store restrictions, pandemic fears, and travel bans, the business experienced growing alarm for their longevity in the face of sharply declining in-store revenue. At the outset of the pandemic, in April of 2020, we revamped this client’s digital presence in response to COVID-19. We worked with them to promote their online sales and candidly spoke to their audience about the need for support. This garnered a tremendous boost in online revenue. We even worked within a decreased marketing budget to help this longtime client weather this storm. For May of 2020, (amazingly) our client did more online sales than ever. Considering their business is seasonal, with Christmas being their main source of annual revenue, boosting sales over November of last year in an off-season month showcases the importance of strong digital marketing efforts, as well as the value of having built up a repertoire with ecommerce customers and a relationship with social media followers. Unfortunately, as the limitations imposed by local government and ongoing fears stifling tourism continued, in-store sales continued to stagnate for months and our apprehensive client decides to cut the marketing spend even further. The aftermath: Even though our client decided to save money by cutting their marketing budget, we worked diligently on their behalf to keep digital marketing efforts alive. Ecommerce sales were steady after the further belt-tightening, but we did see a fall off from our strong May online sales. Eventually, as the pandemic’s impact wore on, our clients received no reprieve from the continuous strain of financial pressure and made the decision to cut digital marketing completely. A decision, we know, that is never easy to make. While the ecommerce sales don’t immediately stop thanks to the drift effect from previous marketing efforts, there was a significant sales dip a few months later. Our other ecommerce clients that didn’t cut their marketing budget have continued to experience healthy online orders, so we know the market is still viable and thriving in the midst of the COVID-19 economic downturn. Unfortunately for our client, the amount of money they “saved” was not actually a savings at all, in the end. Because of the steep loss of online sales, the ecommerce money they lost ended up being significantly more than the money they “saved” by eliminating the marketing expenditure – even with considering the cost of goods sold. Sadly, now they are struggling more than ever. The message: We know financial realities face every business and especially during times like these, cuts need to be made. When making decisions, however, it’s so critical to consider whether by removing marketing expenses if you’re actually “saving money.” If a slash to the marketing budget ends up as a bigger slash to your overall revenue, is it worth cutting? Once you’ve done the clear-eyed exercise of comparing revenue with and without marketing expenditures, your business may not be able to afford cutting marketing efforts. In the current environment, there is a stable online shopping market despite the pinch of recession which is likely driven in part by social distancing effects. So, the good news, is that many shoppers are still shopping, just more online than in the past. You likely will have to adapt your business to capture these purchases by expanding your online footprint and pivoting your marketing efforts to funnel traffic from in person to your online shelves. Before you decide to cut ties with digital marketing, look closely, marketing may very well be the rope keeping your business tethered to shore. Example calculation: If you’re spending 15% on marketing and let’s say you’re marking $15,000 in monthly ecommerce sales but your sales go down 35-50% from cutting out marketing are you saving money or costing yourself money? Especially if you have a high margin item (65%)
  • $15,000 x 65% margin = $9,750 in gross profit
    • $15,000 x 20% on marketing = $3,000 / $3,000 in marketing = $6,750 in net profit
    • $15,000 x 35% loss in sales = $5,250 x 65% margin = $3,412 in net profit
    • $6,750 in net profit with marketing “expense” as compared to $3,412 in net profit without marketing “expense”

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