Managing a business during an economic downturn – 5 tips from business experts
Due to the Pandemic, the past few years haven’t been easy for many small and medium businesses. Unfortunately, with the economic downturn approaching, the near future will also pose new business challenges. The upcoming recession will decrease many companies’ revenues and increase their costs, making it difficult to stay in business. So, is there anything small and medium business owners can do to keep their companies afloat?
We’re here to help! We talked to two business experts, Michal Kowalkowski, co-founder and CEO of No Spoilers, and Mateusz Zalubski, growth marketing expert, business founder, and university lecturer, who have shared with us their advice for running a business during an economic downturn. Read on to learn their 5 main business tips on how to successfully approach a recession.
1. Don’t trust your gut feeling – trust your data
During stable times, trusting your instincts when making decisions is sometimes a good idea, however, in a stressful situation, such as a recession, you should always make informed, data-based choices. You need to understand your business and operations and have the ability to gather and analyze past and real-time data. Therefore, if you’re not focusing on this area of your business already, there’s no time like the present to start.
“I believe that if your company isn’t 100% sure about the data, then now is the time to invest in any form of business intelligence, digital analytics tools, people, or resources that will help you understand how your business actually works.
I’m speaking from the perspective of someone who has almost real-time data, as we measure our efficiency on a daily basis so that we understand our marketing investment and all the revenue that we generate, all the costs related to customer acquisition cost and customer lifetime value. But from my experience, and from all the conversations that I’ve had with people from the industry, I know that it isn’t always that obvious and that businesses still struggle with this and when you don’t have business data you’re basically unable to operate.
A lot of business owners depend on their gut feeling, but I personally believe that your gut feeling is much better when times are good and you’re using it to understand opportunities for growth or for acquisition, rather than using your gut to manage your business in a stressful situation. Because all of us will somehow be affected by the current conditions and our decisions will be biased. So the data is crucial here. You cannot wait. You need to have as real-time as possible data in order to steer your organization. This is crucial. Without data, without business intelligence tools, you won’t be able to understand how to approach the recession.” – Mateusz
Both Michal and Mateusz agree that you need to set your KPIs and measure all aspects of your business, from finances and operations to marketing and sales. This is important at all times, but especially when the economic situation worsens.
“As they say – you make what you measure. So you need to set KPIs for your business, and not only measure the effectiveness of your finances, which I think every company should do, this is a necessity, but also your other sales and marketing activities. You have to know how your campaigns are doing, how is your outreach doing, is one channel more effective than another. Because such data will help you make decisions to focus maybe on a channel that is more effective and drop an outreach channel that does not work, or maybe change the marketing strategy. I mean, without hard, solid data that you gather, you’re in the dark and your playing a guessing game.” – Michal
2. Reevaluate your business and operations before the economic downturn starts
Before the recession starts, it’s good to reevaluate your business and current operations to see whether there are any areas to improve or any projects that should be dropped. In order to do this, you need to gather your data and have the proper resources to analyze it, as mentioned in the previous point.
“If your business has been growing for the past few years, that means you’ve probably introduced some new products or services to the market. Therefore, now would be a good time to actually evaluate your performance and understand which of them are profitable, which of them are your new cash cows, which of them generate revenue and positive cash flows for your company, and which new products or services that you offer actually didn’t succeed. Now is the time to make the sometimes tough decision to cut those products and services that aren’t profitable for your business.
What I mean by that, very often when you’re growing your business and the economy is growing, consumption is growing, and you still have this belief that, okay, this product doesn’t perform as well as we projected it to do, but the overall business situation is okay. So we have other business lines, other products, and other services that can support the growth of this product in the future.
But when all of your revenue streams are under pressure, because of recession, because of the possible slow down, then you won’t have all of those other business lines to support the new products that you, for example, launched two, three, four years ago. Now you can make the decision whether actually you want to continue to have this life support for this new product, for this new service, or you cut it and cut the employment or cut the marketing investment related to this business line. Now is the perfect time to do this and you should rather make those decisions faster. It’s better to do it a little bit earlier than too late because it is still easier to manage your business. ” – Mateusz
And what about reevaluation in terms of staffing? 2022 saw major layoffs happening in tech companies such as Meta, Twitter, and Lyft in preparation for the approaching downturn. Why did this happen and should you also make the decision to let people go?
“The toughest situation is related to potential cuts of employment. This is something that no managers like to do and no business owners like to do, and that’s also why I personally believe that, even though they were tough, the decisions that were made amongst some of the big tech players in the last quarters like Amazon, Facebook, etc., they were probably good decisions. Because it makes sense for you to make your cuts a little bit deeper, but make one cut, and don’t make any further cuts. There’s no worse situation than cutting employment in different tranches because everyone loves the stability of their employment. Nobody likes to fear about his or her next salary or whether they will be employed.
So, it’s much better from the perspective of your team’s motivation and maintaining a positive outlook to make one series of cuts. Cut a little bit deeper, maybe a couple more roles in the company, but make sure that nobody else will be affected by those cuts. And those cuts should also, maybe if it’s possible, allow you to offer some form of salary increase for those people who are left in their organization so that they actually feel more confident about their roles in the organization.
It’s a tough call, it’s always a tough call to cut employment. But when you make this call, it’s better to make one cut a little bit deeper rather than cut 3% of your employees every three months because, after two or three decisions like that, you will have 90% of your workforce being stressed about their employment stability. We don’t want situations like that in organizations, especially given the fact that if the company survives, you need people who are happy about their job and people who are motivated. So, extending those cuts would be a good choice, and I mean it’s not my idea, it’s a tactic that those big companies followed. It’s tough, but I personally agree with this. Make those cuts a little bit deeper, cut more employees from the organization, but make sure that this is the only cut that you make and that nobody else is affected because this will kill the vibe and the culture in your organization. And it will have a negative impact on the trust that people have in their company and their employers and their managers.” – Mateusz
3. When planning, focus on three key metrics – revenue, costs, and profitability
You should take into account three key business metrics whenever making any decisions during an economic downturn. You should always ask yourself – will this help increase my revenue? Will this help cut my costs? Will this help make my business more profitable? If the answer is no, then this is not a good action to be undertaken during a recession.
“Your end goal is always to improve your profitability, so focus on your profit margin and either increase the scale of your business or decrease the scale of operations. So from the perspective of the roadmap and the plans for the future, you should look at those three metrics. If there are some features, like the implementation of a new IT system that will decrease your costs and the cost cut is significant then, obviously, do this as this will help you increase your profitability.
Definitely I would start thinking about your plans and roadmaps from the perspective of those three metrics. What is the impact on the revenue, on the scale of the business, what is the impact on costs, whether you’re able to cut them with new features, new services, new tools, or what is the impact on profitability. If yes, then obviously introduce new products, new services, or optimize current products and services, so that you’re able to be more effective or more profitable when selling. If something doesn’t fit into those three metrics or doesn’t positively impact those three metrics, then I would cut it from the roadmap.” – Mateusz
You may have an existing product development roadmap or plans to invest in new tools or resources, but you need to reevaluate your strategy through the lens of these three metrics. Some companies may need to freeze new launches during the recession, but some, like No Spoilers, keep some new features on their roadmap to increase their revenue.
“Our roadmap, when it comes to new features, did slow down a bit. But we are still implementing the crucial ones, the ones that are requested by our big potential clients that we work with. Basically, the features that got prioritized right now are the ones that help the sales process. So if there is a feature that will satisfy a client or help us onboard a potential one, then it’s good to go. If it’s something that maybe we think would be nice to have, but it’s not helping our current sales, then it’s going to the icebox for now.” – Michal
If you don’t have any opportunities for growth and your revenue is decreasing, then look for areas where you can lower your costs.
“I personally believe that if you don’t see ideas on how you can improve your revenue, then you definitely can find something to improve your costs. I mean, you can always automatize something, you can always find new tools. You can also always optimize your production or your product or your services so that you become more profitable. So switch your attention towards those three key metrics, because otherwise, you’re focusing on wrong things.” – Mateusz
Another recommendation from Mateusz is that during an economic downturn, you should make fast decisions. In a normal environment when a business launches a new product or introduces a new tool the common tactic is to wait 6-12 months to see if it performs or not. However, in a recession you should make your decisions much faster, so you have to make this test period shorter. Mateusz suggests spending 2-6 weeks looking for signals if something works or not, and if it doesn’t, then you should cut it.
4. Customer retention is key during an economic downturn
We asked Mateusz what area of marketing small and medium businesses should focus on during a recession, and “retention, retention, retention” was his answer.
“I think that the last decade was all about growth, customer acquisition at all costs, growth at all costs, and a lot of companies forgot about their current customers. There’s always something better or something more we can do to improve the retention of our current customers. Therefore, try to maximize retention and the customer lifetime value. Think about what you can do to improve customer satisfaction with your product or services, maybe also increase the frequency of contact with them. Basically, make sure that your customers are happy with your company.
For a lot of startups, the majority of their marketing expenditure was previously related to customer acquisition and growing brand awareness, but for many companies, if they were to focus on retention and maintaining their current level of revenue while cutting the marketing acquisition costs to zero, they would either be very close to profitability or even generate positive cash flows. So retention is definitely something that businesses should focus on, now is the time to fix this issue. When the times get better you can come back to thinking about growing aggressively. If your business struggles, you can always cut your acquisition costs and focus on retention.” – Mateusz
5. Don’t shy away from new opportunities
“The irony is that the best thing you can do during an economic downturn is to scale up”, told us Mateusz. But wait, how does this tie in with what we wrote above? Scaling up is a strategy for companies that are confident in their business, have cash reserves, and can see a big window of opportunity.
“If you see an opportunity that your competitors are slowing down, the best thing you can do is to speed up and take their market share, increase your revenue and grow your brand awareness. In difficult times, usually, the first thing that is done by businesses is decreasing sales and marketing activities, so it gives you a chance to be heard. When you’re 100% sure about your products or your services and the condition of your business and you see your competitor struggling, you should hit them harder with your marketing investment. And what you should see is that, actually, your market share within the next 2-3 years will increase. But It’s a risky strategy. One thing that you have to be entirely sure of is that you can actually survive with the strategy, but I also believe that only companies who really understand their current business and operations can do something like this.” – Mateusz
Although this is a risky strategy, it can bear fruit in the future. Therefore, if you want to invest in customer acquisition during a recession, what should you do?
“When it comes to acquisition, when we (startups) have plenty of money, we tend to sometimes invest in the easiest possible tools, so it’s typically paid advertising. However, when the cost of cash, the cost of this capital is higher, e.g. during a recession, we should focus on marketing strategies that are a little more efficient. For B2B SaaS I personally believe that using Linkedin, Youtube, or TikTok as a content platform is underleveraged, so it’s definitely good for you to produce more content. Copywrite a little bit more on those platforms, or record videos that will be interesting for your audience, rather than constantly paying for every impression that you get or paying influencers or ambassadors, or key opinion leaders. So rethink your strategy because like they very often say, probably 50% of your marketing investment is inefficient, it’s just very difficult to figure out which 50%. If something seems inefficient when you look at the data, then cut it and rethink what you should do with the investment.” – Mateusz
Growth during the recession is also nothing surprising for Michal at No Spoilers. Their product helps restaurant owners save costs, so they are seeing the economic downturn as a window of opportunity for their marketing and sales activities. They talk about the current situation in their outreach campaigns and highlight their value proposition of cost savings.
“In our case, the current crisis, the upcoming recession, and the increasing energy and food prices are actually helping our sales slightly. Restaurant owners, who are our target market, need to look for savings and our software helps them do that. We are in a position where we are expanding to new markets.” – Michal
Therefore, if your product or service is like No Spoilers and can help your target customer group with cost savings, it may be a good idea to keep your acquisition activities going despite the recession. However, make sure you do so wisely. Michal analyzed all of his company’s previous marketing and sales data to be able to choose and scale the channel with the highest conversions.
“Measure everything, know how many customers come from what source. If you don’t know where your customers heard about you and why they became your customers, then you cannot increase your sales and marketing efforts because you will be wasting money on things that don’t work.” – Michal
Approaching an economic downturn
We hope these tips from our experts, Michal Kowalkowski and Mateusz Zalubski, will help you better understand how to approach the economic downturn. For more business and contract management insights, follow Michal, Mateusz, and Concord on LinkedIn.
