3 Critical Mistakes That Could Cost You Your Business During a Recession. Here's How You Can Avoid Them. Want to make sure your business survives the looming economic downturn? Here are three mistakes every business leader can avoid by learning from the past.
By Gleb Tsipursky Edited by Maria Bailey
Opinions expressed by BIZ Experiences contributors are their own.
Have you heard the phrase, "Those who cannot remember the past are condemned to repeat it"? So many BIZ Experiencess just react instinctively to the uncertain economic situation they're facing without taking the time to learn from history. Fortunately, we have some clear guidance from the past about the kind of mistakes that business leaders tend to make in a recession, as well as from research (including my own) on how our minds can cause us to make bad decisions.
1. Don't compete on price?
Michael Porter, the great theorist of business strategy, identified two main ways companies can gain a competitive advantage — or rather a competitive "edge" — that drives their success and makes them more attractive than their competitors.
One type of strategy — being a cost leader — focuses on reducing costs. As a result, the company becomes known for prioritizing low prices, which makes it appealing to customers and drives sales. The second strategy involves differentiation based on non-price factors, such as high quality or excellent customer service. Customers who prioritize such factors choose to shop at places that exhibit these qualities.
An excellent example of the two strategies is IKEA versus Pottery Barn. IKEA works hard to provide the lowest possible price, and its customers know it. By contrast, Pottery Barn offers an upscale experience and draws a different clientele.
So if you're not a cost leader, should you try to become one? It's the natural intuition to do so — you're tempted to undercut your competitors to keep customers.
Here's where history is an excellent guide. Researchers examined how 5,278 publicly-traded firms fared in the 2008 recession based on their generic strategy of being either pure differentiators or pure cost leaders. They found that cost leaders fared better in the recession, with higher revenue, better balance sheets and a greater likelihood of surviving the recession.
Given this information, many BIZ Experiencess might think it's wise to shift toward cost leadership from differentiation based on other factors. But the researchers found doing so is a bad idea. Those companies that tried to do so during the 2008 recession didn't improve their likelihood of survival, revenue or balance sheets. That's because most leaders have a significant head start — in their branding, systems and operations. You won't outcompete a cost leader, and you'll lose precious resources of time, money and customer loyalty if you try.
Instead, the researchers found it's best to make reasonable cuts to your prices, enough so that your customers feel you're responsive to their situation. Yet the cuts should still enable you to focus on what differentiates you: quality, service or other factors. In fact, you should double down on your strengths and what makes you special. Know that by doing so, you're in the best position, as history suggests, not to repeat the mistakes of the past.
Related: 5 Lessons Learned From the Recession That Are Still True Today
2. Don't slash your marketing budget indiscriminately
It's tempting to cut marketing budgets in a recession. After all, you can always reinvest in marketing later, when economic conditions improve, right? Wrong.
The problem you're solving for your clients is still a problem. But the problem might have evolved in the context of a recession. Or the specific category of clients who would be willing to buy your offering at the right price might have changed. Or perhaps the specific offering that appeals most to your clients might have evolved. After all, some industries are countercyclical. Dollar and discount stores do well in a recession.
To understand these changes, you must invest in marketing, not cut it. Double down on doing market research, focusing on the changes stemming from the recession. Understand the evolving needs and capacities of your clients. Then, adapt your offering to fit their needs better. Once you've done that, invest in marketing to reach these clients with your adapted offering. Firms that did so succeeded in the 2008 recession, and you can do so as well.
3. Don't jump on the bandwagon
One of our most dangerous cognitive biases — mental blindspots that cause us to make poor decisions when we follow our intuition — is called the bandwagon effect. That term refers to everyone jumping on the bandwagon, meaning aligning with the majority opinion.
BIZ Experiencess succeed in launching a startup by doing something different that fills an unmet need of their customers. Yet many seem to forget the basis for their success when a recession looms. They see headlines and hear from peers that they are making pre-emptive cuts and withdrawing job offers and feel they need to do the same, even if their own balance sheet looks good.
Warren Buffett once said to be "fearful when others are greedy, and greedy when others are fearful." And that's excellent advice.
Just look at the very recent history of an industry that suffered a recession: the cryptocurrency winter. With a rout that wiped out two trillion in value, several crypto companies went bankrupt. And several others would have as well, if not for the crypto exchange currency FTX and its founder Sam Bankman-Fried. He bought or backstopped several companies that overstretched during the good days for crypto and would have gone under if not for his efforts, spending about a billion to do so.
Related: I Started 2 Companies During Recessions: Here Are 4 Tips For Scaling Your Startup During a Downturn
Clearly, Bankman-Fried was sufficiently fearful when others were greedy at a time when crypto looked like it was going to the moon. He built up a vast cash reserve, which he is now deploying when others are fearful by buying up the best-distressed assets.
Your lesson should be to do the same for whatever distressed assets mean in your industry. It may be excellent employees who were let go in a round of unthoughtful job cuts. Or it might be suppliers that had their contracts broken and would be willing to offer you a discount.
That's why I always tell my clients that you need to follow the lessons of history and avoid going with your gut. If you don't make these three mistakes and make sure that history doesn't repeat itself, you'll be well on your way to helping your company survive and thrive in these troubled times.
