The Crisis Cushion: Optimal Advertising Allocation for Marketing

in Marketing, Risk Management
October 27th, 2011

Shuba SrinivasanWhen a spontaneous acceleration problem led Toyota to recall eight million cars globally and suspend sales of several models in November 2009 and January 2010, the blue-chip corporation faced a momentous challenge. To make matters worse, in February 2010, Toyota suffered another blow when reports surfaced of faulty brakes on the Prius hybrid. The defects have since battered the company’s reputation, resulting in huge losses and sinking consumer confidence.

There are two schools of conventional marketing wisdom on what companies should do in the event of such crises:

  1. Some experts argue that companies should spend more money and build brand loyalty before any crisis occurs, providing a buffer to declining profits following a crisis.
  2. Others argue that a portion of advertising budgets should be set aside in case a crisis does occur.

Boston University School of Management’s Shuba Srinivasan, Associate Professor and Dean’s Research Fellow, Marketing, (with co-authors Olivier Rubel and Prasad Naik), in the paper “Optimal Advertising When Envisioning a Product-Harm Crisis,” addresses how companies and their marketing managers can prepare for a potential product harm crisis.  The paper, forthcoming in Marketing Science, demonstrates that there is an optimal course of action for incorporating risk into the allocation of marketing resources.

“Marketing managers are better served by spending less on brand loyalty up front and maintaining a reserve for a post-crisis period.”

Using empirical data from the automobile industry, the authors develop a dynamic model of sales growth that assumes a crisis will occur at random times in the future. Their findings complement theoretical models recommending the best advertising budget decisions that incorporate crisis planning. Using the 2000 Ford Explorer rollover problem as an example, they show that Ford’s baseline sales dropped 65 percent immediately following the crisis, which cost the company $3.5 billion. Advertising spend before the crisis was less effective in maintaining sales afterwards, when profits sank.

“Advertising spending after a crisis is more effective in building brand interest than before a crisis.”

The study’s implications suggest that marketing managers and their companies are better served by spending less on building brand loyalty up front and maintaining a reserve for advertising during a post-crisis period. Further, advertising spending after a crisis is more effective in building brand interest than before a crisis.

Overall, product crises are rare, but when they happen they can be devastating to a firm’s brand equity. Managers are well served by setting money aside from their marketing budgets to be available following a potential product crisis event as insurance against the possible damage to long-term brand equity.

More about the paper “Optimal Advertising When Envisioning a Product-Harm Crisis