What should a small business do when facing a recession? Here are some practical ways to recession-proof your business.
Economic recessions have happened in the past – the 2000 dot-com bubble, the 2008 financial crisis, and now the COVID-19 pandemic. Recessions are bound to happen. Whether you are a seasoned entrepreneur looking to grow and scale your business or simply looking for ideas to make your first million, the same principles on recession-proofing your business apply.
1. Explore other distribution channels.
If you own a store that distributes physical goods, there is no better time than now to dabble in alternative distribution channels such as e-commerce. This is especially true in a COVID-19 world, where shoppers spend more time scrolling on their phones than strolling around supermarkets. In fact, online retail accounted for 16% of all sales in Q2 2020 (up from 11% in Q4 2019).
You don't need to be a marketing whiz to open up your first online store. Many of the top e-commerce platforms are feature-rich, code-free and user-friendly. The website is one piece of the puzzle; another thing you need to consider is driving traffic to your online storefront.
If you are serious about taking your business online, check out business.com's article on developing a solid e-commerce marketing strategy.
Case study: Walmart
When I think of Walmart, I imagine sprawling physical stores, so it comes as a surprise that Walmart has heavily invested in e-commerce and taken advantage of the changes in consumer behavior brought about by the pandemic. By Q2 2021, Walmart is projected to do $10.7 billion in quarterly sales, more than double the amount in Q1 2020 ($4.7 billion).
Walmart adapted to the times, transitioning its brick-and-mortar model to a hybrid model with e-commerce distribution. The company has even created its own version of Amazon Prime called Walmart+, which waives the usual shipping minimums. By creating unique propositions such as this, Walmart is gearing itself up for the digital economy.
You may not be Walmart, but if a company of that size is making moves in the e-commerce space, it's a sure sign that it would be smart to capitalize on the trend.
2. Design your business to sell it.
It's easy to get attached to your business, but during a recession, one of the best ways to get a cash injection is to sell it off. You always want to have that option in your back pocket just in case. The best way to sell your business is to document all income and expenses so you can get an idea of its value. Business.com has a set of tips for selling your business in case you want to dive deeper.
The tricky part is that the valuation metrics for businesses vary widely. If you own a real estate business, valuations are typically in the realm of 10-20 times its annual income, depending on location and market. If you own digital assets such as a blog or website, you're looking more in the ballpark of 2.5-4 times the annual income. Regardless of the model, the principles are the same.
Case study: Your Lifestyle Business
Your Lifestyle Business is a blog run by Jo Barnes, who previously managed a multimillion-dollar Fulfillment by Amazon store in 2015 and hit revenues of $3 million in 2020 before eventually selling the business.
This case is definitely not on the same scale as Walmart, but I wanted to highlight the fact that Barnes used the principles of meticulous documentation to showcase the value of her business. Amazon also makes it easier to manage your finances, since its platform can auto-generate reports, meaning you don't have to record everything on a spreadsheet. I like this case study because this type of business success is much more workable for the everyday business owner.
3. Double down on your employees.
One of the most critical skills for a leader is putting your people before yourself. This quote from Lao Tzu sums it up best: "A leader is best when people barely know that he [or she] exists. When [the] work is done, [the] aim is fulfilled, they will say, 'We did it ourselves.'"
Focusing on your employees means more than offering surface-level perks, like the free lunches every Friday, work-from-home subsidy packages, and unlimited vacation days most tech companies advocate for nowadays. It's about your company culture and how you make your employees feel on a day-to-day basis.
Case study: Zappos
There is perhaps no brand that embodies the importance of culture and employee investment than the shoe company Zappos. Former CEO Tony Hsieh advocated for a culture of happiness and emphasized the importance of team-building. For example, the company expects each manager to spend 10% to 20% of their time on team-building activities.
Cultural fit is so important to Zappos that it offers new employees $1,000 to quit, to ensure each employee really wants to be there and doesn't feel trapped in the job by the need for cash. Because of this obsession with cultural fit, Zappos weathered the 2000 dot-com bubble, as employees took measures such as living in dorm-like conditions and taking collective pay cuts to keep the company afloat during the tough times. They felt valued by the company, leading to Zappos' success and culminating in its $850 million acquisition by Amazon.
You don't need to be a Zappos to double down on your employees. You don't even need the fancy perks. Just treating them with dignity and respect is a good start. If you're there for them when they need you, they'll be there for you when you need them.
4. Be open to pivoting your business model.
Past success does not guarantee success in the future, and this is especially relevant in business. Many industries have been disrupted by innovative solutions that forced slow-to-adapt brands out of business. The recent Airbnb IPO is an outstanding example of an industry disrupter, as consumers are seeking alternatives to traditional lodging models.
With technology evolving at such a rapid rate, you need to keep your mind open to pivoting your business. What this means in practice is keeping up with the trends in your industry. Stay abreast of cutting-edge innovations by researching widely, and consider how your business could incorporate them. If there is an opportunity, hire the right people to execute on it.
In this day and age, you can't be too attached to your ideas, as our next case study demonstrates.
Case study: Blockbuster vs. Netflix
Pre-2000, Blockbuster was a leader in the video rental market, with a peak valuation of $8.4 billion. It never fully recovered from the 2000 dot-com bubble, though, and filed for bankruptcy in 2010.
Netflix began its journey in 1997, weathered (you could even say thrived through) three different recessions, and is now valued at $203 billion. It consistently out-pivoted Blockbuster by noticing the trends in their infancy and capitalizing on them.
In 2005, streaming was novel, and Netflix was an early adopter of the technology. In 2020, streaming is a commodity, and Netflix is distinguishing itself by being a content creator. The company always seems to think one step ahead.
Pivoting your business may seem daunting, but it can reap big rewards when done right. The change could be as small as delivering your service digitally.
5. Create a unique marketing angle.
No matter how stellar your product or service is, it can't go anywhere without proper marketing. To be more effective, skip the showcase of your product's bells and whistles, and instead go straight into your story.
Storytelling is one of the best ways to develop an emotional connection with your customers. For example, if your industry is highly technical, your unique twist might be telling your story through pictures rather than words. If this is the case, think about leveraging platforms such as Instagram and Pinterest to find your audience.
The most successful marketing angles often come from a strong alignment with topical themes of the current times as we will see in our next case study.
Case study: Warby Parker
When Warby Parker started in 2010, it told a story that lay the foundation for the business:
Once upon a time, a young man left his glasses on an airplane. He tried to buy new glasses, but they were so expensive. "Why is it so hard to buy stylish glasses without spending a fortune on them?" he wondered. He returned to school and told his friends. "We should start a company to sell amazing glasses for non-insane prices," said one. "We should make shopping for glasses fun," said another. "We should distribute a pair of glasses to someone in need for every pair sold," said a third. "Eureka!" Warby Parker was born.
Warby Parker's unique marketing angle is in its Buy a Pair, Give a Pair program: For every purchase, it donates a pair of glasses to someone in need. This has separated the company from others like it, allowing to thrive even during the pandemic.
You could try imitating this approach. For example, perhaps donate a small percentage of each sale to a charity, school or scholarship fund.
6. Collaborate with other players.
Teaming up with other companies is one of the best ways to bolster a weakness in your business without paying for it upfront. Even though we are less likely to collaborate during a recession, it is more important than ever.
If you are a real estate maintenance company, for example, you could collaborate with a developer to offer reduced service fees for its customers in return for guaranteed business. You could also look at adjacent markets – for example, as a plumber, you could collaborate with a roofer and share leads directly with each other (without cannibalizing each other's business). This can be a foundation for a referral program, help you grow your network, and improve your word-of-mouth marketing initiatives.
Instead of thinking of business as a zero-sum game, approach it with an abundance mindset and see every potential interaction as a win-win. The best businesses often see collaboration angles where others cannot.
Case study: Xbox and Netflix
Xbox and Netflix are one example of this. We've talked about Netflix already, but I wanted to highlight a specific action the company took during the 2008 financial crisis that showcases its creativity.
As Netflix was still a growing platform in 2008, it partnered with Xbox to give gamers access to 10,000 Netflix titles. This allowed Netflix to expand its market quickly and gain new users without marketing to them directly. It also partnered with Roku and LG Electronics to bring streamed content from its web-based catalog to the television.
It's often easier to survive recessions by being open-minded and finding unique ways to collaborate rather than closing yourself off.
7. Be conservative with your cash.
The most important piece of advice in this article is to be prudent and conservative with your cash at all times. This means keeping enough cash in the bank account to pay off any short-term debts if you suddenly lose revenue from a recession.
You may not be growing as much since you cannot use this extra cash, but it's a good buffer to keep your business afloat when the rubber meets the road. This extra cash could also be very useful if you want to gain assets or buy out competitors at a discount when the recession hits. It also assures your employees that their jobs will not be at risk.
Case study: Wells Fargo
Wells Fargo is an American bank that posted positive net-income returns throughout the 1987 Latin America debt crisis, the 1991 commercial real estate downturn, the 2000 dot-com bubble and the 2008 financial crisis. What's its secret?
Wells Fargo was aggressive with its loan loss provisions and allocated a sum of money each year to cover the expected defaults due to a poor credit market. This was $589 million in 1987, but it increased to $1 billion in 1991 and $16 billion in 2008.
By preparing yourself for the worst-case scenario and saving money for a rainy day, you ensure that your business can survive and even thrive through a recession.
Recessions are an inevitable feature of today's global economy, but these time-tested principles should arm you with the knowledge to survive downturns and even capitalize on them. You will still have to do your homework on how to apply these principles, but they should provide you with a good starting point.