02 Aug Thriving in an economic downturn
We have been experiencing one of the largest stock market appreciations in decades. Regardless of political views, the Trump administration is spending money and we are seeing growth in the economy. But, even when times are good it is prudent to think about what to do when times are not pretty. History provides a plethora of evidence that good times are followed by bad times. Given this reality, we thought it might be a good idea to share our recommendations on how to position yourself to thrive during an economic downturn.
Bolstering Market Share
There are numerous ways to expand your market share when times are good. The higher your market share when times are good, the stronger you will be when the good times turn south. You can do this by:
- Expanding your target market(s) – you can do this by expanding into supplementary markets or expanding into a new location (either internationally or domestically).
- Acting fast when you see bad times on the horizon – during economic slowdowns, a lot of businesses go into survival mode. The best defense can often be a strong offense. Take advantage of your competitor’s weakness, and expand your share of the market as the retract.
- Acquire the competitors you can afford – This is generally the fastest, and often cheapest, way to expand your market share. Not only this, it removes a competitor. To do this successfully requires a full understanding of the acquisition process, deal negotiations, earn-outs. Therefore hiring a sell-side analyst for advice can be crucial.
Buyer beware – even in a buyers’ market, there can be bad acquisitions.
If you see signs of an economic downturn on the horizon we recommend taking the time to review your products/and services, with aims to ensure they meet the needs of your clients. The best way to do this is to ask them. This may sound simple, but it is often the last thing companies do. There are several ways to do this.
- Email surveys – there is a tonne of free software in this space. List your products and ask your customers to rank them!
- Warm calling – call to say “Hi”. It is often easy to hide behind a computer screen, but a friendly call goes a long way. Ask them what they do and do not like in your suite of products.
- Send a ‘break-up email’ – a breakup email is simply a light threat that you are thinking of deleting a product SKU or piece of software. The problem with asking your customers if they like a product is that they will generally give you a list of complaints. A subtle threat that this may be deleted will show you if they actually want it or not.
This is not limited to physical products and is actually easier to implement with digital SaaS products. Every line of code costs money to maintain. You can limit the number of features you have, and make your product lean.
Improve Ally Alliances
Every company needs its allies and a network of relationships with mutual benefits. Smart managers will even rub shoulders with employees of competing companies. These relationships are crucial during bad times, and forming these during a boom is substantially easier. When the economy is poor, the saying ‘dog eat dog’ seems to be more accurate. Most cities have a dozen business-related networking groups every week. Join them and devote a little bit of time to attend. These events are always a pain and often at inconvenient times, but allies are important in business. You might even meet your future boss or some future employees. More so, your clients will most likely be at the same event, and therefore, these can be a reasonably cheap way to increase customer leads.
When times turn bad things often become cheap, and this is definitely the case for advertising and marketing. During an economic downturn, the first department that generally sees budget cuts is marketing. If your competitors are cutting their marketing spend, then not only will the marketing companies start getting a little desperate, which means deals, you will be able to expand your brand awareness. This will allow you to gain better visibility at a lower overall cost. Your budget may also be drying up, but this is why having a rainy day fund is sometimes the difference between surviving or thriving during this time.
Although we have told you to think about market expansion and marketing spend, this is no time to be a drunken sailor. Don’t burn out, and don’t waste your money. The 2008 financial crisis lasted a lot longer than previous downturns, and the next one might be even longer. Most business owners overwork themselves during good economic times. When the economy takes a turn, they usually push even harder. Work smarter, not harder and pick good deals not any deals.
List down all of your company’s outputs, and estimate the specific revenue they produce. This is often easier said than done as many products are interlinked. But knowing where you will get your best bang for the buck makes picking where to spend easier. Any job that is not producing revenue should be delegated to junior staff, or scrapped completely. This will allow your team to focus on revenue-generating, economic-malaise-beating activities. If you have assets that are not generating much margin, or a margin dilutive, think about selling them off.
Be Prepared for Buy-Side M&A
Another option to survive a downturn is to sell. If you have defended your business against a downturn you will not be desperate when a buyer comes along. In fact you might even secure a nice price. If your competition is nearly bust, and you are thriving, you will actually become an acquisition target for large companies looking for a deal. A “buyer ready” business is a business that effectively plans for and reacts to economic changes. Ask yourself this question – would you rather purchase a company that has had enough forward thinking to plan, or the unprepared firm about to go bust. Either way, a downturn is the time to get greedy when everyone is fearful. Hence, buy-side M&A becomes more fruitful.
An economic downturn is an expected, not a random, event. Therefore being ready and preparing for hard times is not only prudent, it is common sense. You can survive and possibly even thrive during this period of economic uncertainty if you are prepared, and have a small rainy day fund available. One of the best times to expand is actually when everyone else is trying to survive.