Cutting marketing spending often backfires on businesses – new research could help investors distinguish shortsighted cuts from smart ones

Businesses are often tempted to cut their marketing budgets for the short-term savings it provides – but those cuts can cause problems in the long term. A new study my colleague Tarun Kushwaha^[1] and I^[2] published in The Journal of Marketing^[3] proposes a method for predicting whether these counterproductive cuts will take place up to a year in advance.

We gathered transcripts of nearly 25,000 earnings calls held by public companies from 2008 to 2019. We then analyzed how management teams discussed marketing and earnings. We found that the more earnings-oriented language was in a call — think words like “lucrative” or “revenues” — the more likely a management team was to cut their marketing budget for a boost in earnings.

Unlike business-as-usual budget shifts, the motive in these cases was to raise short-term earnings to gain personal profits – for example, to boost stock prices before an executive retires – to raise immediate funds, or to satisfy investor pressure and expectations. These cuts in exchange for a bump in earnings are shortsighted, since investing in marketing tends to grow a company’s market share over time.

Why it matters

Executives often feel pressured to meet short-term earnings targets at the expense of long-term goals, survey data^[4] and research have shown. Cutting costs is one way businesses make themselves look better in the short term. And since investing in marketing takes time to pay off, marketing spending often winds up on the chopping block.

My fellow marketing professors call these “myopic” marketing spending decisions – “myopic” being a fancy word for shortsighted. They often happen before initial public offerings^[5], share repurchases^[6] and executive retirements^[7].

While these myopic decisions have short-term benefits, they harm investors, customers and other stakeholders in the long term. After companies myopically cut marketing spending, they often lose market value^[8]; that’s why such cuts are linked with worse stock-market performance in the long run. A tool that helps investors identify myopic marketing spending would help them protect their portfolios from negative long-term consequences.

Our method isn’t just backward-looking – it can be used to forecast future shortsighted cuts to marketing spending. Investors could use it to analyze publicly available earnings-calls transcripts for useful data up to four times a year. We estimate that for every US$100 invested, using our method to avoid investing in shortsighted companies could return an additional $6.44 over four years compared with conventional methods. Marketing firms and advertising agencies could also use it to identify companies that plan to pare their marketing budgets.

What’s next

As part of our research efforts, my team has published the algorithm and data^[9] necessary to replicate our findings. This will let individual investors and other stakeholders gain valuable insights into executives’ intentions regarding the funding of their marketing and research departments.

While our research has primarily focused on transcribed text from earnings calls, we see more potential in analyzing the audio and video from these calls. Audio analysis could reveal insights from tone, pitch, pauses and filler words, while video analysis could capture the brief involuntary facial expressions known as micro-expressions.

The Research Brief^[10] is a short take on interesting academic work.

References

1. ^{^} Tarun Kushwaha (scholar.google.com)
2. ^{^} and I (scholar.google.com)
3. ^{^} The Journal of Marketing (doi.org)
4. ^{^} survey data (www.mckinsey.com)
5. ^{^} initial public offerings (doi.org)
6. ^{^} share repurchases (doi.org)
7. ^{^} executive retirements (doi.org)
8. ^{^} lose market value (doi.org)
9. ^{^} algorithm and data (doi.org)
10. ^{^} Research Brief (theconversation.com)