COVID-19, also known as Coronavirus, has swept the world, claiming thousands of lives and wreaking havoc on the world economy. The future remains uncertain as we struggle to manage the chaos.
For small business owners, this is a particularly trying time. Furloughs, layoffs, imposed restrictions on business operations, and social distancing have many fearing the worst.
A recent report from CNBC in April tells us that around 2 out of 3 entrepreneurs believe they may have to close their doors if the situation persists for more than another five or six months. Most would agree that a recession is imminent.
Though the Coronavirus pandemic presents unique challenges, some form of downturn has always been inevitable. The businesses that are least prepared for a time such as this are at greater risk.
Approximately 1.8 million small businesses closed down during the Great Recession that hit the United States in 2007-2009. A large segment of those businesses were not prepared. Things were going well for most and it was assumed the good times would never end.
When the topic of a recession came up in conversation, many business owners responded, “We’ll deal with it when it happens.”
Well, it happened.
But seek and ye shall find. Recent history provides a blueprint for those of us who want to learn from the past. While many variables come into play, actively managing the situation plays a key role in whether your business survives.
A Special Comment on the Coronavirus Pandemic
The disruption society has experienced due to the pandemic cannot be overstated. This crisis has affected individuals and businesses on multiple levels—personal and financial. Even our mental and emotional health has suffered as a result.
I understand that many businesses must overcome circumstances brought on by the pandemic that go beyond their control. While the Coronavirus poses additional problems for businesses that are not covered in this article, the strategies presented here are just as relevant for the current business environment as they are for any other recession period—past, present, or future.
Prepare for the Aftermath in Advance
I live in the southeastern United States. Each year, with few exceptions, a hurricane threatens our coast. Unlike a pandemic or other natural disaster, we have time to prepare on short notice. But hurricane shutters and two dozen cans of soup do nothing to reduce the massive damage that occurs during and after these monster storms.
While most people are concerned with surviving the hurricane, the aftermath often proves to be worse than the storm itself. It is not uncommon for weeks or months to pass before life returns to normal.
The same is true for a recession. We must not only survive the financial crisis or downturn, but the period of recovery as well. To make matters worse, we usually have no idea how long that recovery will take.
It is during this recovery period that people are most protective of their finances. They spend more time making buying decisions or put them off altogether. Many folks are concerned with paying the mortgage and keeping food on the table. Those who are more fortunate are still sensitive about how they spend discretionary income. It is not uncommon for them to cut back in one area to make room for another.
The business owners who understand this change in consumer behavior beforehand will have an advantage over many of their competitors who will suffer through trial and error. The first step is to anticipate how your customers’ spending habits will change. You can start by talking with the ones you have now. Use the opportunity to bond with them on a personal level while also discovering how to adjust your marketing messages.
Prepare for a Change in the Way People Think
In a time of economic downturn or crisis, emotions run high. People worry about the values of property, investment accounts, and interest rates. Every time they turn on the television or log onto the Internet, they are flooded with one negative forecast after another.
Eventually, this takes a toll. People begin to think the worst and develop negative attitudes. Businesses come under even more scrutiny for the way they operate. The quality of their products and services is evaluated to a greater degree. Advertisements, customer service, prices, conflict resolution, and more, will be put under a magnifying glass.
How will you respond?
Be ready for this change in thinking. Demonstrating more empathy and concern for people will allow you to meet them where they are.
Don’t Cut the Marketing Budget Too Much
Most successful business owners know that marketing is a necessity, not a luxury. Yet in times of financial hardship, it is tempting to cut the marketing budget. But the cons of reducing the dollars spent on business promotion almost always outweigh the pros. This is especially true if it takes several touch points to convert a customer.
How much time goes by from the moment you target a potential buyer and make contact with them—through an ad, referral, social media post, or website—to the moment they make a purchase?
This time period is known as your sales cycle. The sales cycle will vary from one industry to another (and often, from business to business).
While cutting the marketing budget may save some money in the near-term, the effects will lag. As an example, let’s assume your sales cycle is 90 days. Obviously, if you are doing less marketing, you can expect to gain fewer customers. Unless you have done some in-depth analysis, you will not know the true negative impact on customer acquisition for 3 months.
Even if you have estimated the negative impact, there is something else to consider. In the previous sections, I wrote about changes that occur in the way people think during and after an economic crisis or downturn. This shift in thinking could significantly affect the results of your marketing effort as well.
It will likely be more difficult to acquire each new customer, which means you will have to exert even more effort to promote your business than before. Knowing this, does it still make sense to cut your marketing budget?
If you are forced to make cuts, think of other ways to get customers organically. This goes beyond the scope of this article, but we would be glad to talk with you about how to do this.
Discount Prices at Your Own Risk
Cutting prices is another tactic many business owners use to generate leads and sales during tough economic times. However, many businesses do not understand the real impact discounting has on the bottom line.
To illustrate, I will use a simple example. Let’s assume you acquire 50 new customers over the course of 30 days. Let’s also assume gross revenue per customer is $1,500, with $1,050 in total costs of goods and services (COGS), and a net profit margin of $450.
That means your gross revenue is $75,000, COGS is $52,500, and net profit is $22,500 per month.
Expressed as an equation:
50 new customers x $1,500 gross revenue = $75,000 – $52,500 (COGS) = $22,500 (net profit)
Now, let’s say you reduce prices by 10%. Your gross revenue is now $1,350 ($1,500 – 10% = $1,350).
What impact would this have on net profit? Remember, your COGS (cost of goods and services) remains constant at $1,050 per customer. That means your net profit is now $15,000.
50 new customers x $1,350 = $67,500 – $52,500 COGS ($250 x 30) = $15,000
You are now making $7,500 less per month than you did before. Although you reduced prices by 10%, the decrease in net profit is 33.3%.
Expressed as an equation:
$22,500 (gross revenue at original price) – $15,000 (gross revenue at discounted price) = $7,500 / $22,500 = 33.33%
But it could be even worse. Why?
Remember, the way people think will change. It may be more difficult to acquire each new customer. Your sales cycle may get longer or your conversion rate could go down because making sales will be tougher. The costs of promoting on websites, social media, advertising, and networking may fluctuate, depending on the platform.
Many small business owners lower their prices in an attempt to offset the challenges of acquiring new customers. The thinking is that lower prices will offset consumer spending concerns and increase their propensity to buy. While this may seem logical, it makes no sense to do this without having hard-core data to support it.
It is not uncommon for small businesses to cut their marketing budget and slash prices, with devastating consequences. Resist these anxiety-driven responses and think twice before making changes that could damage your business’s financial health even more.
Branding Is More Valuable Than Ever
If you have not engaged in building a brand for your small business, now is the time to start. The branding process allows you to create separation from competitors and position your offer with the people who need and want it most. This is going to be even more important in the coming months and years.
READ THIS if you are new to branding: What Is Branding and Why Is It Important?
A recession forces change. Now is the time to re-evaluate everything you have been doing and adjust for the future. You may discover it is time to change the customer segment you have been targeting. Perhaps the people you are currently serving are no longer best suited for your business going forward.
You may also consider modifying your products and services to better match the needs of current customers as well as new segments you choose to pursue. The same applies to your marketing, service, and sales processes.
Make transitions gradually but without delay. Waiting too long could leave you lagging behind the competition but making adjustments too quickly could cause confusion and increase the margin for error.
Your Brand Promise
Your brand promise is a summary of what your customers can expect to get from your company every time they interact with it. Though they are different, the brand promise is sometimes referred to as a Unique Value Proposition (UVP).
A brand promise incorporates elements of a UVP but also includes other unstated elements. It is comprised of the tangible benefits and experiential feelings customers receive from your product or service.
Take a look at the promise you are making to customers and make sure it aligns with any directional changes in your business’s branding and marketing.
“When times get tough, loyalty gets tested.”
Relationships with customers have always been important but even more so in a recession. Focus on creating more opportunities for relationship building, not only with current customers but new ones. When times get tough, loyalty gets tested. You want to make every effort to cultivate customer retention and the best way to do that is to deepen the relationship with them.
Take a hands-on approach with everything you do. Reduce the amount of automation you have been using, increase the number of personal contacts, and make more effort to ensure customer satisfaction.
Manage Expectations Diligently
People will be more sensitive about spending money in a tough financial environment and will expect even more from the companies they do business with.
Quality is always important but during periods of financial difficulty, it will separate the businesses that prosper from the ones that barely survive or fail. One aspect of providing quality is in managing your customers’ expectations.
Don’t make assumptions. Find out what they want from your products or services. Discover what they like or don’t like about your competitors’ offers. If possible, take advantage of people who choose not to buy from you by finding out why they stopped short or chose a competitor.
Opportunities Abound—If You Look for Them
It is easy to sit back and wait. It is comforting to accept less because everyone else is. And while it is true that there are limits to what you can control, opportunities are there when you look for them.
You will have to determine what that means for your business, but here are just a few examples of potential opportunities in a recession:
- Create additional revenue by developing new products and services or additions to current ones
- New customer segments you have not yet targeted
- Adjustments to current processes and systems
- Changes to shipping, manufacturing, and storage that result in cost savings. (Warning: never cut costs at the expense of quality!)
- Complete projects that have been delayed
- Plan for a return to normal—what will that look like for your business?
- New strategies and tactics for marketing and promoting your business
- Evaluate contracts with vendors and suppliers—is it time for a change?
- Analyze data—take note of trends, what works, what doesn’t work, where you could cut costs, and gaps you can capitalize on
Marketing in a recession is not for the faint of heart. But you will persevere and prosper by focusing on branding your business, deepening customer relationships, assessing and adjusting your sales and service processes, and delivering quality at a high level.
If you would like to talk with me personally about organic marketing opportunities or how to brand your small business, contact me at email@example.com.
Until next time,