Marketing cuts often backfire on companies – modern research could assist investors distinguish short-sighted cuts from intelligent ones

Companies are often tempted to cut their marketing budgets because of the short-term savings it provides – but those cuts can cause problems in the long term. Up-to-date research from my colleague Tarun Kushwaha and I published in Marketing Magazine proposes a method to predict whether these counterproductive cuts will be made up to a year in advance.

We collected transcripts of nearly 25,000 earnings conference calls from 2008 to 2019 at public companies. Then we analyzed how management teams discussed marketing and earnings. We found that the more earnings-oriented the language in the conversation was—think words like “lucrative” or “revenue”—the more likely the management team was to cut its marketing budget in order to raise earnings.

Unlike ordinary budget changes, the motive in these cases was to raise short-term profits in order to achieve personal gains—for example, to raise stock prices before an executive retires—to raise immediate funds, or to satisfy investor pressures and expectations. These cuts in exchange for increased profits are shortsighted because investing in marketing tends to raise a company’s market share over time.

Why is this significant?

Management often feels pressured to meet short-term profit targets at the expense of long-term goals, survey data and studies have shown. Cutting costs is one way companies improve their image in the compact term. And because marketing investments take time to pay off, marketing expenses often end up on the cutting block.

My marketing professor colleagues call these marketing spending decisions “myopic”—“myopic” is a fancy word for shortsightedness. They often come before initial public offering, share buyback AND pensions of management staff.

While these short-sighted decisions provide short-term benefits, they hurt investors, customers, and other stakeholders in the long run. After short-sightedly cutting marketing spend, companies often lose market value; therefore, such cuts are associated with worse stock market performance over the long term. A tool that helps investors identify short-sighted marketing spend would assist them protect their portfolios from negative long-term consequences.

Our method isn’t just backward-looking—it can be used to predict future short-sighted marketing cuts. Investors could apply it to analyze publicly available earnings call transcripts for actionable data up to four times a year. We estimate that for every $100 invested, using our method to avoid investing in short-sighted companies could yield an additional $6.44 over four years compared to conventional methods. Marketing firms and ad agencies could also apply it to identify companies that are planning to reduce their marketing budgets.

What’s next

As part of our research efforts, my team has published algorithm and data it is necessary to replicate our findings. This will provide individual investors and other stakeholders with valuable information about executives’ intentions to fund their marketing and research departments.

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

A research summary is a compact overview of intriguing scientific papers.