Companies are sometimes tempted to chop their marketing budgets to make short-term savings – but these cuts may cause problems in the long run. A brand new study by my colleague Tarun Kushwaha and me Published in The Journal of Marketing proposes a way to predict as much as a 12 months upfront whether these counterproductive cuts will happen.
We collected transcripts of nearly 25,000 quarterly earnings conference calls from publicly traded firms between 2008 and 2019. We then analyzed how management teams discussed marketing and quarterly earnings. We found that the more results-focused the conference call was—for instance, words like “lucrative” or “revenue”—the more likely the management team was to chop its marketing budget in favor of accelerating profits.
Unlike typical budget changes, these cases were about making short-term gains for private gains – for instance, to spice up stock prices before a manager's departure – to boost immediate funds, or to satisfy investor pressures and expectations. These cuts in exchange for higher profits are short-sighted, as investments in marketing are inclined to increase an organization's market share over time.
Why it will be significant
Managers often feel pressured to attain short-term profit goals on the expense of long-term goals. Survey data and studies have shown that cutting costs is a technique for firms to be higher off within the short term. And since it takes time for marketing investments to repay, marketing spending often finally ends up being wasted.
My marketing colleagues call these decisions “short-sighted” – “short-sighted” is a elaborate word for short-sighted. They often occur before IPOs, Share buybacks And Retirement of executives.
These short-sighted decisions can have short-term advantages, but in the long run they harm investors, customers and other stakeholders. When firms short-sightedly cut their marketing spending, lose market value; due to this fact, such cuts are related to poorer stock market performance in the long term. A tool that helps investors discover short-sighted marketing spending would help them protect their portfolios from negative long-term consequences.
Our method is just not only retrospective – it might even be used to predict future short-sighted cuts in marketing spending. Investors could use it to research publicly available transcripts of quarterly earnings calls as much as 4 times a 12 months for useful data. We estimate that for each $1 invested in avoiding short-sighted firms using our method, a further $6.44 might be earned over 4 years in comparison with traditional methods. Marketing firms and promoting agencies could also use it to discover firms planning to chop their marketing budgets.
What's next
As a part of our research, my team has Algorithm and data needed to breed our results, providing individual investors and other stakeholders with beneficial insight into executives' intentions regarding the funding of their marketing and research departments.
While our research has focused totally on transcribed text from conference calls, we see more potential in analyzing the audio and video data from these conference calls. Audio evaluation could provide insights from tone of voice, pitch, pauses, and filler words, while video evaluation could capture the temporary involuntary facial expressions referred to as microexpressions.
The Research Brief is a summary of interesting scientific papers.
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