‘Everything is getting squeezed’: Half a year in, the economic crisis is contorting ad spending

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It’s been an intense year — even by advertising’s standards — and there’s still half of it left to go. 

What better time to pause and take stock of what’s happened and what it all means for the future.

Uncertainty ahead

The economy is torn between chaos, confusion and control due to a volatile mix of post-pandemic global inflation, rising interest rates, tightening fiscal policies across the largest economies, and the impact of Russia’s war in Ukraine on commodity prices. Not to mention the fact that consumer confidence is currently at an all-time low. It pays to be a rational optimist for marketers these days. After all, this downturn will eventually recover. Then again, it’s hard to be optimistic when there’s no end in sight. At best, there’s a recession next year. At worst, this may be the beginning of a depression. For now, all marketers can do is make educated bets.

This sounds familiar.

Sure, there are parallels to how the pandemic short circuited economies worldwide two years ago, but this downturn is more complicated. Now, stuff costs a lot more, of course, yet people keep buying. CEOs warn of a recession, when nearly every measure, from employment to GDP shows a booming economy. The markets are awash in contradictions right now. Still, marketers are nothing if not adept at wringing opportunities from every crisis — something agency execs are reminded of now. Everything is getting squeezed, including margins. Nothing new there. The squeeze was there long before covid arrived — last year notwithstanding. It’s just tighter now, according to agency execs.

“Clients are still spending but when it comes to paying more for media or additional services there are a lot of excuses being made,” said one senior agency executive on condition of anonymity because they were not authorized to speak to Digiday. “It feels the current macroeconomic situation is being used by marketers to avoid paying more for talent or negotiating new deals on the back of inflated fees.”

Bad news for agencies

Or any other business that makes most of its money from ads for that matter. These companies weren’t growing quickly when media dollars were being spent more freely; their business models battered by challenger brands, the advent of zero-based budgeting among advertisers, disintermediation by the platforms and higher raw material input costs to name a few.

Slow advertising has cascading consequences on all these issues for agencies and ad tech vendors. Namely, that they’re left in a chokehold by a lack of access to financial support, quality media and talent. It’s left many of these businesses picking between turning a profit or providing services that marketers want. For many of these businesses, damage limitation is the priority. The usual tense conversations with marketers are even tenser now.

“When I talk to agencies the cost inflation of their overheards sits somewhere between 30 to 40%,” said a media management consultant on condition of anonymity over concerns of jeopardizing current deals. “That’s not a sustainable way to run a business. Someone has to pay for that inflation. Marketers are adamant it won’t be them. They feel they have enough inflation to contend with elsewhere.”

Like the inflation on TV?

Very much so. And it’s keeping marketers up at night. They worry that they’re being forced to pay more to fewer people in those moments thanks to the onset of streaming services. That’s as much of a measurement challenge as it is an audience one. Think about it: the cost of linear TV is rising because people are watching more on demand while the cost of on demand impressions is relatively static because most advertisers are buying them at set prices. In other words, the more advertisers spend on reaching a broadcaster’s addressable audience, the more expensive it becomes to reach their linear counterparts.

“Networks will point to live events & sports as rationale, but those audiences too are migrating to streaming options,” said Craig Stein, senior consultant at independent search consultancy R3. “As such, it’s incumbent on marketers and their agencies to push the networks for more advantageous pricing for Linear TV buys, especially as spend will continue to shift digitally. Inflation alone cannot justify the current marketplace dynamics.”

So, media dollars are being cut?

Yes they are being cut, but only so they can be put to work harder elsewhere. If anything, spending is stable. But the longer this downturn continues, the more unstable spending will get as markers try and react. In fact, it’s already dawned on many marketers that they’re paying more for less when it comes to media. Inflation really is everywhere. In times like this, marketers tend to zero in on finding ways to continue to advertise without having to increase their spending. Choices that tend to be predicated on the marketer’s appetite for risk: do they put more dollars into performance media where it’s easier to show a more direct correlation between the investment and the result or do they lock in prices upfront with so much uncertainty ahead?

And that’s just the tip of the iceberg.

The path for marketers through a downturn used to be fairly straightforward: cut inefficient advertising to help maintain squeezed margins. But straightforward doesn’t mean easy, risk-free or cheap. Not least because vendors and media owners are nowhere near as charitable as they were during the last downturn. Don’t expect vendors or media owners to accept cancellations or deferred payments without a cost this time around.

“A big talking point among platforms and media owners at Cannes was how they manage the expectations of marketers per the inventory they have already locked down and whether they’re going to let them out of those deals,” said John Piccone, regional president for ad tech vendor Adform in the Americas. “In a world where flexibility is critical, certain line items on media plans are going to disappear quickly.” 

Who would want to be a senior marketer right now?

They’re trying to maintain both the reach and profile of their brands, but inflation and potentially reduced spend will make this tricky. Pressure like this can play on marketers’ insecurities. The danger is that marketers seek to offset those higher costs by pouring money into poor quality online media chasing lower CPMs that are, at best, inefficient and unproductive and, at worst, lost to fraud. Marketers will need to hold their nerve and ensure that they maximize the impact of spend — and that may just mean taking fewer but more meaningful big swings. If this happens it will be the advertising equivalent of a flight to quality — when investors trade high-risk high-return assets for lower-risk lower-return assets at times of economic uncertainty.

“Supply paths are going as direct as possible and logs are getting increasingly verified,” said Tom Triscari, an economist at consulting firm Lemonade Projects. “It’s a flight to quality. Very few companies have the wings to get there with customers. Many can spin a good story. It always depends on what marketers believe to be true.”

https://digiday.com/?p=454524

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