Speaking the CFO’s language is more important than ever
In our latest journal, guest writer Ian Whittaker explains why agencies and marketeers need to speak the language of the CFO and the Board.
We are in a strange position when it comes to the state of the economy. On the one hand, the news is awash with tales of slowing growth, record lows in consumer confidence (the recent GfK UK consumer confidence survey was the lowest in the 40 years of the survey and talk of a repeat of 1970s style inflation (which I think personally is hyperbole). On the other hand, unemployment is at near record lows, employers are complaining about labour shortages, workers – especially those in professional jobs – are seeing sharply increasing wage growth and the airports are packed with people paying much higher prices for flights than pre-Covid days. As has been said, if this is a recession, it is a very strange one.
Not surprisingly given this environment, advertisers are wondering what they should do. The classic response to an impending recession would be to cut back on marketing spend, especially given it is something that can be done quickly. However, in an environment where – for many companies – consumers are not only spending but also absorbing price increases which their historical models suggested should be unsustainable, there is a natural (and rightly so) reluctance to reduce advertising spending given the risks of losing share to competitors.
So far, the signs look positive. Despite the comments from the Tech players about slowing advertising growth and therefore a slowdown in hiring (and Snap missed expectations on Q2 numbers, causing the shares to fall by a quarter), the overall picture looks positive. Interpublic, Omnicom and Publicis all reported stronger than expected revenue growth for Q2 and all raised their full year organic revenue growth targets. The noise from corporates so far is that the consumer is proving resilient.
My own view is that the smart advertisers will be the ones that continue to spend. The reasons for this view could make an article in itself (in summary: the inflation rate is likely to abate as we lap higher comparables; consumers have a willingness to spend where they can and want their experiences back; any talk of a recession / economy tightening may be relatively short lived and the danger of a “stop-start” approach to brand investment; oh, and the evidence itself of the benefits of continuing to spend even if there is a recession). However, advertisers and marketers are going to have to make this case to their bosses, that is CFOs and CEOs, and company boards.
That is why it is going to be more important than ever for those involved in the advertising industry to speak the language of the CFO and the Board. As I mentioned above, advertising spend is often targeted in a recession because it is (a) can be cut immediately and (b) gives an immediate boost to margins and earnings because advertising spend is expensed in the current year through the P&L, and not capitalised and then amortised across several years as is the case with most IT spending. When Sam Tomlinson from PwC and I spoke at the Advertising Week Europe conference on the topic, it was clear from the reaction afterwards that many recognised this but did not know what practical steps they should be taking.
What are these steps then? Well-researched, properly analysed and platform-neutral evidence is one key tool (is an attribution model provided by a player with skin in the game truly neutral?). To highlight one of a number, I think Mark Evans, Direct Line’s Marketing Director, has done this incredibly well and it is clear both from their results and the way advertising is supported that boards are willing to back marketers that can show how advertising delivers results.
Another key tool is to speak the language of the CFOs and boards and to frame advertising in a way where those at the top can grasp the importance of it to the future success of the company, a topic I explore in an upcoming series with JC Decaux. One of the key phrases to talk about is advertising as ‘intangible capex’ i.e. just as firms invest in a factory to generate future sales, so they need to do the same with advertising to reach the same result. It also gives a framework to explain to boards why they should not cut spend in a recession (if you build a factory, the worst possible approach is a stop-start one) as well as why they need to maintain the brand (as with any factory, you need maintenance spend, otherwise the cost of repairs is usually far greater than the maintenance cost).
What was clear from the Q1 results was that companies are willing to accept lower margins if it means higher top-line growth. Advertising plays a key part in that and so it starts with an inherent advantage. However, to get this spending over the line when boards are under pressure from shareholders and have worries about the economy, advertisers and marketers need to explain the benefits of what they do in a language that boards and managements can understand. Over to you.
Ian Whittaker is a Media / MarTech / Tech Analyst with over 20 years experience as an equities analyst in the City. Thank you Ian for your valuable insights.
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