"What happens when newspapers cut back on marketing investments? An empirical analysis"

Researchers presented a resource optimization model that publishers can use to measure whether they are investing too much, too little, or the right amount among news, advertising, and distribution departments for maximum revenue and profits.

The authors offered an approach based on dozens of newspapers’ experiences for deciding optimal distribution of layoffs and buyouts among departments for revenue and profit maintenance.

Faced with a crisis in the newspaper business, many newspapers are cutting costs. In fact, research has found that three-fourths of all newspapers have cut 10 percent or more of their newsrooms. The authors analyzed how cuts in news, distribution, and advertising departments affected total revenues and profits. The analysis was based on 1999 Inland Press Association data from 327 newspapers under 85,000 daily circulation.

Among the findings:

1. Newsroom cuts are the most costly on revenues. A one percent cut in newsroom expenditures led to a .44 percent drop in revenue. A one percent cut in the ad sales force led to a revenue drop of .24 percent. A one percent cut in the distribution force led to a .08 percent drop in revenue. In dollar amounts, the picture is even more clear. Data from small newspapers with an average circulation of 13,000 showed that a 1 percent cut in the newsroom reduced expenses about $10,000 but led to a revenue drop of $23,000 and a profit decline of $3,000. A 1 percent cut in advertising sales force reduced expenses by $8,000 but led to a revenue drop of $12,500 and a profit decline of $600. Finally, a 1 percent cut in the distribution department reduced expenses by $6,400 but led to a $4,000 drop in revenues, while showing a slight gain in profits.
2. The bigger the cuts, the impact on revenues gets progressively worse. For example, a 10 percent cut in newsroom expenditures led to a 5 percent drop in subscription revenues, while a 50 percent cut in newsroom expenditures led to a 30 percent drop in subscription revenues.
3. Newsroom cuts are the most costly on profits. A 5 percent cut in news expenses led to a 1 percent drop in profits, while a 5 percent cut in advertising department budgets led to a .3 percent cut in profits. A 5 percent cut in distribution budgets led to a .2 percent drop in profits. Similarly, a 50 percent cut in newsroom expenses led to a nearly 40 percent drop in profits, compared to a 22 percent drop in profits if the advertising department faced a 50 percent cut.

The authors advised that newsrooms should be the last department cut. When cutting costs, newsroom cuts are by far the most damaging to revenues – and the longer the reductions occur, the greater the acceleration of damage. The authors wrote, “We find that newsroom cutbacks hurt a newspaper’s revenue many times more than cutbacks in either distribution or the sales force departments.”

The study also found that cost-cutting evenly across the board may destroy profitability. The authors suggested that newspaper managers utilize sophisticated statistical models to plan and evaluate their investments, and that collaborations with academic researchers can help.

Contact Dean Esther Thorson at 573-882-9590 or thorsone@missouri.edu, Professor Murali Mantrala at 573-882-2734 or mantralam@missouri.edu, Elina Tang at 573-884-6416 or Ytang@mizzou.edu