It’s been a minute since I’ve played with economic data so let’s take a look at what we've witnessed over the past few years to find learnings for the potentially rocky road ahead.

Last year, Americans spent $7.1T dollars buying things that the US Department of Commerce considers to be ‘retail’. This was an 8.2% increase compared to 2021 and a 31% jump from 2019 spending levels:

But after looking at these numbers, why does it feel like 2022 was more challenging than what’s depicted here?

Two reasons:

1. Inflation. When you adjust these numbers for inflation, 2022’s 8.2% YoY growth rate drops down to a measly 0.2%.
2. Spending habits. Consumers shifted from buying nice-to-haves to essentials.

Look below for what happened in the ‘Furniture & Homegoods’ category in 2022. In April, total US spending in the category was up 27% compared to 2019, but in just eight months, that growth rate quickly deteriorated by half, finishing the year only up +13%.

​I pulled similar charts for a few key categories here. ​

Why did this happen? The cost of living in America increased.

Americans spent 48% more on gas in 2022 than in 2019, 33% more at restaurants, and 22% more on groceries.

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“In terms of total spend, [the data] is remarkably stable. What’s happening is as goods spending slowed down a bit, services spending really took up all the slack. And so, consumers have just shifted their spending, but they’re spending the same amount.” - Visa CEO

On top of these changes, we’re also seeing the American consumer’s wallet become thinner and thinner. The average consumer only has 2% of disposable income saved and is relying more on their credit cards now than they have in the last 20 years.

So as a business owner looking at the road ahead, just like your customers, your first thought is probably to find ways to reduce your expenses and extend the runway for your business.

As you sort through your list of high and recurring expenses, I can imagine marketing sticks out like a sore thumb.

That’s because some view marketing as a cost, rather than as an investment. And see brand-building like an endless money pit, making it the first to go as it lacks proven and immediate ROI.

But based on history, cutting marketing (and especially brand building) is the wrong move to make in downturns. During previous recessions, companies that increased ad spend, or even just maintained it, saw outsized returns once the economy turned itself around.

Some examples to note from the Great Recession of 2007/2008:

• Uber, AirBnB, and Square were all founded
• Amazon Web Services (AWS) was launched in 2006, helping Amazon grow sustainably through the 2010s and beyond
• T.J. Maxx increased their marketing spend by 15% to reach customers outside of their core and by 2009, 75% of customers had not shopped there the year before (a must read)

If you do (or already have) cut your marketing investments, then you’ll likely see an amazing honeymoon phase of maintaining sales levels with extreme efficiency (because you have no costs). But, sadly, this ride comes to an end rather quickly and you’re dropped into a worse spot than if you had maintained your investments.

“The sales of a brand are like the height at which an airplane flies. Advertising spend is like its engines: while the engines are running, everything is fine, but, when the engines stop, the descent eventually starts.” - Simon Broadbent

Here’s a view of this decline from the Institute of Marketing Science who were able to pull together insights from a cohort of 57 brands who cut all mass media spending for at least one year:

On average, regardless of the size of the brand, sales declined by 16% after one year without advertising and those declines grew each year following.

Perhaps more important, is how brands of different sizes and growth trajectories were impacted from the pausing of advertising. Where smaller brands typically suffered greater declines than bigger ones who continued to grow for 1-2 years before quickly reversing:

So instead of turning the dials down, the move is to turn them up. And use share of voice as a means to guide your path.

Share of voice is a comparison of one brand’s awareness on different marketing channels against competitors. As we talked about last week, share of voice is typically highly correlated with sales and makes for an awesome measure of current and future performance.

Increasing your share of voice may not always mean spending more. As competitors in your category pullback, your relative share will naturally increase.

‘When others go quiet, your voice gets louder"​
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For example, if the other players in your category cut their ad spend in half and you maintain yours, you’ll get a serious boost in share of voice.

And if a variety of categories also begin to cut their marketing endeavors, you’ll start to see some nice declines in media costs allowing you to stretch your existing investments even further.

Below is a look at how this came to life over the past two years using Meta Ads CPMs and an effectiveness ratio built using the average spending by Americans each month.

For example, as advertisers pulled away from marketing in March 2020, you can see the reduction in CPMs come to life while the effectiveness ratio jumps up to levels not seen again until mid-2022.

March 2020 was an incredible time to advertise. Surprisingly, consumer spend didn’t fall off a cliff as many would have expected - it actually increased 3.5% MoM and brands who stayed in the game saw short-term and long-term benefits.

Keeping on this timeline, you can see the gold rush that was November 2021, where CPMs skyrocketed (as usual) but likely due to limited supply and atypical shopping patterns, the effectiveness was diminished. Too many were late to the party.

And then, most recently, we see that this past October presented us with a gem of a month - the intersection of an early shopping season and delayed marketing pushes, created the best month we’ve seen in years.

So with waves of uncertainty ahead, take the time to think through a strategy that will help your business not only make it through the challenges but come out with a headstart. Here are three things I’d be focusing on:

Maintain your performance marketing efforts.

• If consumers continue to look for your products, serve them with relevant ads at the moments that matter most.
• If you’re struggling to drive profitable returns, consider adapting which items you sell, how you position your brand, and how you're investing your performance dollars (more here from HBR).

Start, maintain, or increase your branding efforts.

• Put yourself in a position to come out of this potential downturn with a serious headstart.
• Capitalize on the opportunity to acquire market share from potential current and future customers with relevant messaging (Walmart example)

Understand your customers and your addressable market.

• Segment your target audience based on their demographic and psychographic characteristics and hone in on the groups that are most likely to value your products/services. What may be a luxury to some might be a necessity to others, tell your story.