Business owners always find themselves in the middle of a juggling act. Procuring inventory, managing staff, satisfying customers, and other demands occupy their time as these entrepreneurs operate their enterprises. Recently, another variable has complicated things further: the macroeconomic environment. While some institutions such as Goldman Sachs cite a 35% likelihood of a recession in 2023, other publications such as the Economist believe that a severe economic downturn is undeniably imminent. Regardless of how the next twelve months play out, it is worthwhile to prepare yourself commercially and financially in the event of a challenging economic environment. Here are ways that you can position yourself well amidst a recession.
Negotiate long-term contracts
Input costs can wield a material influence on the bottom line of any business. Amidst rising costs, it can be worthwhile to try to negotiate lower prices for a longer time. This can be mutually beneficial – you get to have a reliable cost amidst a time of uncertainty while the supplier can lock in business for a longer period of time. While larger businesses may have the advantage to negotiate a higher volume of business, there is hope for smaller businesses as well. Adriane Stewart, who runs an ice cream business, has prioritized relationships with vendors who will continue to work with her business even in tough economic times.
Build customer loyalty
Kate Yearwood Young, a financial advisor and business owner, suggests, “Target your product or service to a well-defined customer and make it a must-have among your demographic.”
If your client base feels connected to your brand and product, it will be more difficult for them to reduce consumption of your offerings. This should be top of mind for business owners throughout different environments, but it becomes especially important when people are tightening their belts a bit and spending less. There are ways to entice customers by sharing exclusive sales, providing discounts for people who refer their friends to your business and celebrating recurring customers on social media.
Showcase your budget-friendly services
When times are tight, customers will start to scrutinize their budgets thoroughly. Every expenditure requires a sound rationale for why they should spend money on it. In times like these, it is best to use the Lipstick Effect to your advantage. This theory suggests that consumers turn toward less expensive purchases that give them joy as other forms of entertainment become unaffordable. Now is the time to highlight the products and services on the lower end of the price spectrum. As such, pivoting marketing campaigns to these less expensive items can work to your benefit.
Focus on cash runway
Amidst a strong economy, businesses tend to focus on growth, growth, and more growth. This includes adding headcount, increasing marketing spending, and working to engage clients in new geographies and/or demographics. Now, it is crucial to focus on sustainability rather than expansion. Make a plan to analyze how your business would fare in a baseline scenario (assuming the current state of affairs), an upside scenario (revenues improve without significant increases to expenses), and a worst-case scenario that impairs profitability in a material way. Adjust your budget after completing these exercises.
Pass-through costs to customers
Longstanding businesses can implement this tip more easily than younger enterprises. Raising the price point can help your business maintain profitability. But, this decision can be a tough needle to thread. On one hand, increased prices can help keep your business afloat if this change doesn’t deter customers. On the other hand, consumers may turn away from the product if they find the price has increased without a change in quality. This relates to a fundamental economic concept: price elasticity of demand. The Harvard Business Review summarizes this in a succinct manner: “…price elasticity shows exactly how responsive customer demand is for a product based on its price.” Implementing changes gradually is a smart strategy to dip your toe in the water and understand how your customers may react.
We are facing tough times, BAUCEs. But there are ways to navigate a recession without losing the successful business that you have been building. Reference the above guidance and take what you need as the economy enters a new phase.