Data suggest that marketing budget cuts may be the most costly of all – and among the hardest to overcome.
It’s time to bust the misguided myth that cutting marketing budgets during tough times is a smart move.
For those who possess a baseline understanding of the role of marketing and communications, the warning not to cut this budget during difficult financial times may serve as a frustrating emotional trigger. “Why does this cut seem to be a reactionary instinct within nonprofit organizations?!”
I’m not sure – particularly in view of data underscoring the importance of departments that serve as the “face” of organizations in today’s connected world.
Cutting marketing budgets negatively impacts attendance
As regular readers know, IMPACTS tracks, quantifies, and analyzes data concerning 224 visitor-serving organizations. In an effort to get to the bottom of what really happens when cultural organizations cut marketing budgets, we examined organizations that had recently cut their marketing budgets by at least 15%.
Cutting marketing budgets has an impact on visitation, and visitation is an important source of revenue for many organizations.
(This cause and effect seems like common sense to me. But, alas, here we are…)
It was not difficult to pull several organizations among the monitored 224 that cut their marketing budget. Of course, those that cut budgets observed presumably related repercussions in their attendance numbers. Much more interestingly, I think, we noted four visitor-serving organizations that shared a pattern that may best illustrate what happens when marketing budgets are cut during tough financial times. Not only did these four organizations cut their marketing budgets by over 15%, they then seemed to realize their mistake and immediately tried to make up for it the following year by increasing their marketing budgets – making them excellent case studies ripe for analysis-friendly charts. Woohoo!
Here’s a chart summarizing the respective annual attendance levels during a three-year duration to organizations A, B, C, and D:
The orange bar (left) indicates the annual attendance to each organization during the time of their typical budget allocation (i.e. before any cuts). This is the baseline.
Then, each of the four assessed visitor-serving organizations opted to decrease their annual audience acquisition budgets (i.e. paid advertising) by ≥15% when compared to their “typical” annual marketing investment. The blue bar (middle) indicates the annual attendance to each organization after the marketing budget cut. Overall, annual attendance declined by an average of 6.1%.
Each of the four organizations brought their marketing budgets back up in Year Three. The green bar (right) shows the annual attendance to each organization after increasing their marketing budget.
Why attendance does not immediately recover when marketing budgets are restored
Here’s the kicker: Attendance didn’t fully recover for any of these organizations! Not even close. As it turns out, marketing budget cuts are the gift that keeps on giving…
Attendance to visitor-serving organizations does not recover when typical marketing budgets are restored for two, connected reasons:
A) Lost word of mouth endorsement
One will note that attendance remained depressed in Year Three – fully two years after the cost-saving measures were implemented, and in spite of the fact that the organizations resumed what had been theretofore “typical” levels of advertising investment.
The driving reason why attendance did not immediately recover for these organizations is because fewer visitors means fewer word of mouth endorsements and reviews. It means less top-of-mind awareness because fewer people are talking about their recent experiences and encouraging others to attend. Word of mouth endorsements play a major role in determining an organization’s reputation – and they are a cornerstone of the visitor-engagement cycle.
The fact that attendance does not return to baseline evidences the durability of a well-intentioned, bad decision. We measure our mistakes and wins in annual budget cycles…but the market measures the impacts of our bad decisions and wins in a separate chronology.
Much in the same way that organizations underestimate the overall impact of unexpected closures on attendance so, too, do they likely underestimate the impact of annual budget-driven decisions on their overall, long-term financial health.
B) The need to “buy back” lost audience members
But I’m not telling you the whole story: Not only did these four organizations return their marketing budgets to the baseline condition, they each additionally increased their budgets in Year Three by between 3-12% after seeing the effects of the Year Two budget cut.
Let’s take a look at the budget cuts and increases. We’ve designated Year One as the baseline budget for each organization. It’s indicated as an index value of 100. Year Two shows the budget decrease for each respective organization, and Year Three shows the comparative increase. For instance, Organization A cut its budget by 17.2% in year two, but brought it back up – and added 3% in year three. And, yet, as we observed in the previous chart, attendance did not return to the baseline condition.
You’re seeing it right: All four organizations increased their marketing budgets beyond what they had spent in Year One – and not one of them was able to restore pre-budget cut attendance levels. Organization C increased its spending 12.4% over Year One and still received over 24,000 fewer visitors in Year Three. Yikes!
It is far less expensive to retain audience members than it is to re-acquire them. (While this is generally a well known reality, I have some interesting data to post in the coming months about the costs of retaining and attracting members to cultural organizations. I’ll let you guess the outcome.) By underspending the opportunity in Year Two, these organizations had to “buy back” their lost audience in Year Three. In sum, these organizations lost revenues in Years Two and Three, and had to spend even more yet in Year Three to re-acquire the audience that they voluntarily let go in Year Two.
Organizations generally cannot cut marketing investments without corollary impact. It stands to reason that a reduction in audience acquisition investments will result in reduced attendance. (As was popularized by the famed economist Milton Friedman, “There’s no such thing as a free lunch.”)
This isn’t an illustration of four organizations led by stupid people (they aren’t) demonstrating an exception. Instead, these are four organizations without outlying behaviors in the assessed duration (a major expansion, special exhibit, etc.) that made decisions (presumably) based upon industry dubbed (but mistaken) “best practices” that underscore a rule: Reducing marketing budgets tends to have negative impact on market engagement. We monitored these organizations, and know of their spending strategies and tactics. These entities weren’t spending wantonly, capriciously, or superfluously. It wasn’t as if they were spending $5 million on advertising when $1 million would have been quite sufficient. Instead, for whatever reason (and they could have been well-intended reasons), each of these organizations sought cost-savings in their annual budgets and opted to reduce their audience acquisition budgets.
Tickets to cultural organizations are not bought. They are sold.
Misunderstanding this may be at the heart of the self-defeating practice of cutting marketing budgets during times of financial strife.
While it makes for a great movie line, “If you build it, they will come” may be a silly way to run a cultural organization. For likely visitors to these types of organizations, time is more important than money. Moreover, schedule is the single biggest motivator of visitation. A primary goal, then, should be to create an experience that is worthy of peoples’ time.
Likely visitors to cultural organizations are increasingly competitive audiences to target – and the couch represents growing competition. It’s not enough for an organization to simply exist. It’s important to underscore your organization’s “so what?” and the unique experience that it offers.
Existing generally isn’t enough to get people in the door in today’s competitive environment. In many ways, adequate audience acquisition is an investment and not a cost. Until the culture of cultural organizations catches up with market realities, entities may be doomed to make bad business decisions.
It’s time that cultural organizations stop pretending that the best way to save money is to take it away from what drives their greatest source of revenue.