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It will be nearly impossible for anyone to walk away unscathed, but companies can take steps to mitigate losses.
It’s official. We are in another recession. According to Kristalina Georgieva, the managing director of the International Monetary Fund (IMF), the downturn this time around is going to be as bad or worse than what the world experienced in 2009.
As an entrepreneur, this is bad news. As it is with any downturn, we can expect a lot of job losses and pay cuts. This inevitably leads to a drop in customers’ purchasing power, which, in turn, impacts your business, leading to further layoffs.
While it will be nearly impossible to get away from this unscathed, businesses may take a few steps to mitigate losses. Here are a few tips to consider.
1. Put business interests first.
With recession looming large, businesses — even those with healthy cash flow — face uncertainty in their operations. In such times, it is natural to feel conflicted between helping your business or your employees. Ideally, you do both. But when the future is uncertain and cash flow is tight, many entrepreneurs have to decide: Should you spend your last penny on keeping your employees happy, or on keeping your business afloat?
A great boss might choose to help their employees weather the downturn. But if your business collapses, there will no place for your employees to come back to. So, while this is understandably a controversial opinion I think it is prudent to place higher focus on the survivability of your business. While this may not be good news to your employees in the short term, this is best over the long term for your business, your employees and the economy in general.
2. Provide more value to your customer.
When the economy is not doing well, customers tend to cut down on their expenses. Even if you offer something that they cannot do without, customers tend to reduce consumption, and this affects your top line. For instance, households may cut lawns less frequently, or go to cinemas less.
One way to mitigate lower revenues is by offering more value for the money you get paid. For instance, a cinema may offer free popcorn to their customers. Or a barber may offer unlimited haircuts for a flat annual fee.
When you pack more value into your product or service, customers tend to stop viewing your offering as an expense and start acknowledging the savings they make. While this may not be enough to grow your customers in a downturn, it may be nearly enough to retain at least your loyal base.
3. Collaborate with upstream and downstream providers.
It’s worth reiterating the two ways average customers cut down on expenses. First, they chuck out any expense that they can live without. Movies, take-out and multiple streaming subscriptions may all fall under this category. Secondly, they reduce the money on things they absolutely need. Groceries and fuel are good examples of this.
Partner with people who offer services that are upstream or downstream to what you provide. Take the example of a business making mobile phone cases. Businesses in the upstream include mobile phone makers, while those in the downstream include stores and platforms selling these phones and accessories to customers.
Going back to the previous section on providing more value, a mobile phone maker might offer free phone cases. It’s a good value trade-off that benefits both the phone maker and your business. This strategy works exceptionally well with software and app builders that can be packaged into the phone OS and be activated straight out of the box.
4. Innovate with pricing offers.
This is one of the most effective ways to retain your customers in a downturn. Pricing innovation must focus on two specific objectives: making your offering more affordable to the customer, and improving your own cash flow.
Consider partnering with services like Zebit, Splitit,or Klarna, which allow buyers to pay for your product or service in smaller installments. This makes your product more affordable to the buyer. If you are making use of a service that enables split payments, just make sure the service still pays you in full upfront.
Depending on your offering, you may also consider switching from charging licensing fees to monthly subscriptions.
But be aware that the solution you pick may impact your cash flow. For example, with a license fee, you make your money upfront. With a monthly recurring fee model, you may have to rely on payments made over time. Depending on your capital investment, this solution may or may not work.
Another way to improve cash flow would be to create incentives for customers who pay upfront. For example, if you are a SaaS service provider, you may offer a free month to customers who pick annual billing over monthly billing. This is a win-win for both the customer and the business.
A downturn is difficult for everyone: the business owner, her employees and customers. Just remember that the economy always bounces back. Even with the current outlook, the global economy is expected to turn over by next year. Hence, your focus should be on survival. Do everything in your power to ensure you’re not among the hundreds of businesses likely to close shop.
By Anand Srinivasan