Increasing Advertising During a Recession: A Timely Move or an Easy Way to Go Bankrupt

Over the last year the US, once flying high, has fallen and face planted into a somewhat ugly recession.  For people with steady jobs the fear is of course the dreaded pink slip.  But as long as they can keep their jobs their paychecks in most cases will remain the same.  For small business owners a recession is often felt in the pocketbook.  With less people buying their goods and services their revenues and profit margins can start to sink.  And it can be painful for a number of reasons.  First many business owners have an emotional attachment to their business.  When the business starts to flat line its hard to readjust to the new realities of your surroundings.  If you are a restaurateur it might be hard to scrap plans for opening a new location across town even if the economic realties of the market make it clear that continuing ahead with previous plans is illogical.  The second difficulty is that it's hard to readjust ones life to deal with a lower take home pay.  So while a small business might see a 20% drop in revenue that could translate to a 40-50% drop in profits.   And while you might have lived on a smaller revenue 10 years ago it's hard to go back to that.  Living without regular out of states vacations is one thing going back to that point is even more difficult.  And these somewhat harsh realties are what drive people to look for something, anything that can restore their business to its previous health and prosperity.  

First I want to point out that in some cases advertising in a recession can be a wise move to increase market share and take advantage of a bad market.  But more often what I see is this.

"Our revenues are way down"
"That's horrible"
"Let's spend a ton of money on advertising and hope we can put this behind us"

The problem is that the difficulty for this business is not that they didn't spend enough on advertising last quarter.  The problem is that we are in a world wide economic depression caused by billions of crappy loans real estate loans given out over the last few years.  And yes everything is interconnected but putting out more ads for a local restaurant is probably not going to change this.

Simply put sometimes business owners make asset allocation decisions based on emotion instead of their current economic realty their business exists in.  A few reasons that increased advertising might be a bad idea for your business.

1) The number of potential customers is decreasing
2) In many industries your competitors are increasing advertising to "spend their way out of a recession"
3) Increased advertising and decreased customers is a bad market to ramp up your advertising budget
4) Spending more on advertising can mean advertising in new venues.  Often when testing new venues you can wasn't a lot of money discovering mediums that simply don't work for your business. 
5) You can increase your expenditures and your cash burn rate.  So basically the economy might eventually turn around but your business might not be there to see it. 

Ok so if the answer is not doubling or tripling your advertising what is the answer?  Here is my advice

1) Cut Expenses that are not needed.  Comb through your budgets for extras you added during better times but are not needed. 
2) Keep current advertising that is working.  Whatever is currently providing you business I would stick with.
3) Cut advertising that is not working.
4) Adjust

Number 4 is probably the most difficult but important.  If ones business is affected by the recession (and most are) it might be a good idea to simply accept the possibility of a reduced monthly income for awhile.  I am not saying people should give up on their business or not attempt to increase profits.  But during a recession it might be a good idea to keep working to achieve higher goals but at the same time when you are doing your monthly personal budget accept the possibility that a weakened economy often results in less customers and lower revenue.  This means if you planned on buying a new car or taking an extra vacation it might be a good idea to change those plans. 

In the end by operating in a logical manner a business can survive a recession and hopefully be in a position to flourish once the economy recovers.