Here we are at the precipice of another recession. Will we tumble in, or return to an economic environment that fosters growth and free innovation? Not a clue. I have been through enough of these bust cycles to know, however, we will boom again.
When the economy is going great, there is enough demand and cash to buffer bad decisions. Companies increase salaries and throw spiffs and massive bonuses at their staff in an effort to stimulate more sales. Leadership is not that important during the good times but as soon as sales begin to fall and competition for customers rises, leadership becomes critical.
The Silicon Valley is positively littered with dried up bones of once great companies that died during bust times. Driving up Highway 101 from San Jose north to Menlo Park, there are old signposts and long-dead company signage left standing in repurposed parking lots. This is not unique. You can find the same historical failures by the side of the road in any city. Those fossils of the innovation whose shoulders we stand on today are reminders of why the decisions you make right now are so important.
Probably the biggest impact management of a company can have on overall longevity lies in the few but all-important decisions made during the start of a recession.
The hierarchy of differentiation. This might seem like a non sequitur, but it is the key factor to surviving and thriving through a recession. Differentiation depends on understanding your products and their value, so let’s focus on where that value comes from.
Your customers purchase products. For this exercise, you can safely lump services into the products bucket. Even if you sell plumbing repair or technology courses, these services are really just intangible products. Customers in the truest sense set the price of products. Yes, you place a price tag on every product you sell, but the customer decides whether or not to purchase. If they don’t purchase from you, you really no longer have a product but instead you become an organization that makes things and piles them up into warehouses for storage. So to avoid becoming a 501.3c, you generally alter the pricing of your products to match the willingness of a customer to purchase from you.
THAT is where most leaders make the first mistake. People purchase products to solve their problems. Period. How badly they wish to solve their problem and the suitability of your product to do that determines the price the market will bear and the overall longevity of your company.
If you find yourself forced to drop your pricing in order to improve sales numbers, that means your product is no longer solving your customer’s problem. You could be in a boom market or in the middle of a recession and you will likely run into the same problem if your product does not match what your customer wants. The only difference is that in a boom market, or in a niche without much competition, your customers are more willing to purchase something that only kind of fits their needs. And so you might happily be running your out of balance company through a bust cycle, not realizing that you made a critical error and did not focus on that hierarchy of differentiation.
Quoting a terrific book off my marketing shelf by Theodore Levitt1,
Customers attach value to products in proportion to the perceived ability of those products to help solve their problems. Hence a product has meaning only from the viewpoint of the buyer or the ultimate user. All else is derivative. Only the buyer or user can assign value, because value can reside only in the benefits he wants or perceives.
What does this mean for you as we sit on the edge of a potential recession? Do not drop your prices. Instead evaluate the value of your products. The true value in the context of the current moment as defined by your customers. Maybe your customers no longer value your product. Does this mean that dropping the price will increase sales? No, probably the opposite because by hosting constant sales you are just putting up a massive billboard that says: We are struggling for some reason that could be that our product is flawed or maybe that no one wants it. So, we dropped the prices and now you will purchase it, right?
If you created your products with customer research at the base. If you know what a market requirements document is and have actually used one in your company, then you have a product that will satisfy a customer, somewhere. Your current customer base may have drifted. Now they want the faster, better, more colorful version of your product and you did not keep up with the times. But differentiation is key in these moments. If you are not able to stack up against your competition any longer, redefine your customer.
Yes! That is a key to surviving in lean times. Do not drop prices or fire all your sales staff. Dropping your prices is a close-out strategy when you what to get the boxes out of your warehouses to make room for the next version. You drop prices when you think your product will have no value to anyone in the near future.
If you find yourself, as we are now, on the edge of what could be a recession that might leave a trail of the shells of dead companies in its wake, do not panic and cut prices. Instead, act calmly and decisively. If your products are not selling it is just that your customers don’t want it as much as something else right now. You can chase after those customers and devalue your brand, but no one in the history of ever decided to marry the needy person who did whatever they could to stay with you. Instead, stop chasing them and spend your time looking at the value your product brings to a new set of customers. That is the beauty of targeted differentiation. Your product may not be interesting to one kind of customer any longer, but their will likely be another application for your product lying in an uncrowded niche. If you can pivot quickly enough, you will not need to spend anything on product improvements. You will not need to drop your prices to ridiculously low levels. You will be able to expand your base and survive until the market turns and the next boom begins.
1 Levitt, Theodore. The Marketing Imagination, 2nd ed. (The Free Press, a division of Macmillan, Inc., 1986), 77.