Advertising Spending Over the Business Cycle

Value LeveragingDeleersnyder, B.; Dekimpe, M.G.; Steenkamp, J.E.M.; Leeflang, P.S.H. · 2009Journal of Marketing Research
Topicsadvertising spending·business cycle·national culture·co-movement elasticity·cross-country·private label·stock price

Imagine the economy turns down and finance asks you to cut advertising in proportion. Business-cycle sensitivity measures how sharply advertising moves with the economy, each against its long-term trend. Should you cut in step, or keep supporting brand share and long-run firm performance?

Advertising spending usually follows and amplifies the business cycle.

Data chart

Most advertising series amplify the economic cycle

Share of 118 advertising series, each for one country and medium, in percent, grouped by how advertising moves relative to the economy.

62%26%12%More sharply than the economy — 62%With it, one for one or less — 26%Not with the economy — 12%
  • Most advertising series move more sharply than the economy.

Most advertising series move with the economy, and the majority move more sharply than the economy.

Annual spending and economic output after inflation, 37 countries, four media, 1980-2004. Exact counts: 73 of 118 moved more than one for one; 31 of 118 moved with the economy by one for one or less; 14 of 118 had non-positive responses. The last two counts are calculated as 104 minus 73 and 118 minus 104; displayed shares round 73/118, 31/118 and 14/118 to 62%, 26% and 12%. Paper p. 17 and Table 2, p. 38.

Data chart

Print advertising moves more sharply with the economy

Average percent movement in advertising spending after inflation for each 1% movement in economic output after inflation, both around their long-term trends.

One for one with the economyMagazines1.70%Newspapers1.54%Television1.27%Radio0.79% (n.s.)
  • Print advertising moves more sharply than television and radio.

Magazines and newspapers have larger average movements with the economy than television and radio.

Table 2, p. 38; 118 series across 37 countries, 1980-2004. Exact advertising responses per 1% movement in economic output: magazines 1.70%, newspapers 1.54%, television 1.27%, radio 0.79%. Radio's marker means its response is not reliably above the one-for-one benchmark; it does not establish a response below that benchmark. After cultural and economic controls, magazines differ reliably from television; newspapers do not (Table 3, p. 38).

Action guide

  1. Commit to steady advertising before a downturn.If your company has the financial resources, keep advertising less responsive to the cycle, or even raise it in downturns. Weigh long-run firm performance and private-label exposure.
  2. Set downturn advertising rules country by country.A country's culture and economic structure are linked to how sharply its advertising moves with the cycle.
  3. Give each medium its own downturn assumption.Print advertising moves more sharply with the economy than television or radio.
  4. In packaged goods, check private-label risk before budgets follow the cycle.Have your brand and finance teams document it first.
  5. Include advertising continuity in board risk discussions.Have investor relations present its link with long-run stock-price growth as an association, not a cause.
  6. Use each country's expected market cut as your share-of-voice benchmark.Before you set your own cut, ask your team how far total advertising in each country is expected to fall.

Evidence

  • Of 118 advertising series, one per country and medium, 88% move with the economy and 62% move more sharply. On average, advertising moves about 1.4% for each 1% movement in economic output, both around their trends after inflation.
  • For each 1% movement in economic output, advertising moves about 1.70% in magazines, 1.54% in newspapers, 1.27% on television and 0.79% on radio, all around their trends. Radio is not reliably above one for one.
  • Advertising is less sensitive to the cycle in cultures high in long-term orientation or power distance, and more sensitive where uncertainty avoidance is high. Sensitivity rises with stock-market pressure and falls where more foreign-owned multinationals operate. Collectivism shows no reliable link.
  • A sensitivity of 2.5 rather than 1 is associated with advertising-industry growth about 2 percentage points a year lower, against an average of about 6%.
  • In packaged goods, a sensitivity of 2.5 rather than 1 is associated with private-label share growing about 4 percentage points more over 25 years. The study treats this as initial evidence.
  • Among 26 global advertisers, a sensitivity of 0 rather than 2.5 is associated with about 1 percentage point more stock-price growth a year.

Key takeaway

If your company has the financial resources, keep advertising less responsive to the business cycle.

Limitations

The study covers total spending in four traditional media across 37 countries from 1980-2004, not campaign sales or brand equity. Its links to long-run outcomes are associations, and it does not test digital media.

Source

Deleersnyder, B., Dekimpe, M. G., Steenkamp, J. E. M., & Leeflang, P. S. H. (2009). The Role of National Culture in Advertising's Sensitivity to Business Cycles: An Investigation across Continents. Journal of Marketing Research, 46(5), 623-636. https://doi.org/10.1509/jmkr.46.5.623. Figures are from the September 2008 manuscript.

Exact values behind the rounded figures: average advertising movement of 1.39% per 1% movement in economic output; 1.6 percentage points lower annual advertising-industry growth, 4.3 percentage points more private-label share growth over 25 years, and 1.3 percentage points more annual stock-price growth for their respective comparisons; the shares are 104/118 moving with the economy (88%), and mutually exclusive groups of 73/118 (62%), 31/118 (26%) and 14/118 (12%).