“Cotton prices have jumped 95% in the last 12 months, so we’re going to cut advertising.”
That doesn’t seem like it makes much sense, yet it’s happening today. Why?
To demonstrate, we’ll explore a hypothetical apparel manufacturer who ends up buying a lot of cotton. And here’s what is going on in the cotton market- it’s at a 140-year high:
Cotton Prices, courtesy of indexmundi.com
So the apparel market is going through quite a shock these days. The sequence of events that starts with commodity prices and end with budget cuts. Let’s explore the mechanism:
1) Commodity prices will squeeze product margins, reducing marketing ROI.
- Yes, it’s true that even if your TV, for instance, drives the exact same number of people to buy your product, your marketing ROI will fall. So too, by the way, will ROI on any other sales-driving project.
2) And if Marketing’s ROI goes down, we should spend less on it.
- The gut reaction to a low ROI is always to cut it.
We routinely tell clients that the math is only half of the work we do- and in this case we recommend more, not less, marketing spend. Why?
1) Prices will rise, but price gap to competitors probably won’t.
- All players in the space face the same input price reality, and will settle back into a “new normal” equilibrium. Market share, therefore, will likely stay intact.
2) However, as the whole category price rises, the pie will shrink.
- Consumers will buy fewer, or less frequently, or trade into (heaven forbid) non-natural fibers. And what is the easiest lever a firm has to drive category demand?
3) Therefore, goose advertising to offset category declines.
- Admittedly, it’s is a tough sell: In an already challenging macroeconomic time, pressure in the channel, and declining marketing ROI, we’re recommending an actual increase in marketing spend?
Absolutely we do. As Frederick Phillips said, “It is often hard to distinguish between the hard knocks in life and those of opportunity.”