January 26, 2022

The Most Common Business Trajectory I Deal With

Here's a classic situation. Look at the five year projected trajectory for this brand.

In a post lockdown world, new customers stabilized and the business is projected to slowly degrade. With an ad-to-sales ratio of 25%, this company really cannot afford to spend more on marketing to grow.

Why do I say that?

Let's pretend that the business cuts back on their marketing spend by 20% for just one year. Here is how the trajectory changes.

You cut back for one year ... just one year ... and the top-line crumbles and it does not quite return to prior levels even when you restore ad spend to prior levels.

Here are top-line sales for five years plus the year just completed.

  • Base Case (Millions):  $80.2, $78.0, $76.6, $75.6, $74.9, $74.3.
  • Reduced Ad Spend:    $80.2, $71.2, $74.0, $73.5, $73.6, $73.4.
Now let's look at profit:

  • Base Case (Millions):  $12.1, $11.7, $11.5, $11.3, $11.2, $11.2.
  • Reduced Ad Spend:    $12.1, $13.4, $11.1, $11.0, $11.0, $11.0.

You generate an additional $1.7 million profit by cutting back on ad spend for one year ... but ... BUT ... you lose file momentum, causing you to $1.1 million of profit in the next four years.

This is the situation I run into all the time. The business is stuck. Completely stuck. If it wants to be more profitable it can be more profitable ... for a period of time ... then profit erodes because you lose file power. However, to generate additional profit you hurt top-line sales, and you hurt top-line sales for subsequent years even if you restore ad-spend to prior levels.

This is what happens when you depend upon marketing to generate orders. Eventually you trap yourself. You can't spend more because it is unprofitable. You can't spend less because the business suffers. You're stuck.

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