Small business owners face an uncertain future right now. Media outlets, political leaders, and economists have talked about a possible (likely) “recession” and even the potential for a “depression.”
We may have no control over global economic policy, but we can do a lot to help to keep a recession from happening in our own homes and workplaces. That’s why we prepared this brief guide to help you cut through the language of fear and focus on what you can do to help your business grow during a possible recession.
What Is a Recession?
Technically, a recession occurs when the Gross Domestic Product (GDP) of a nation contracts for two consecutive quarters. The last time a recession hit the U.S. was in December 2007. That recession ended in June 2009. Normally, the U.S. economy experiences a recession every four years. However, between 2009 and 2020, there has been no recession at all. Recessions can last for as little as six months or as long as five years, but nearly all of them last less than 18 months.
An economic depression is a sustained downturn in economic activity. The U.S. has experienced only one true depression in its history. That was the Great Depression, which lasted from 1929 to 1939. No subsequent recession has come anywhere close to seeing either the depth or the length of the economic hardship that families and businesses faced during the 1930s. Yet, even after such extraordinary troubles, the U.S. and the world economy had strengthened tremendously within a decade of the depression’s end.
Of course, all this terminology and history mean little when your own revenue stream appears to be drying up. As Ronald Reagan famously quipped, “A recession is when your neighbor loses his job. A depression is when you lose your job.”
So don’t lose your job, or our business, when times are tough, and avoid experiencing a depression at your house no matter what the markets are doing.
What Opportunities Does a Recession Hold for Small Business Owners?
You’re an entrepreneur. That means you know how to determine what people need and where to get it for them. You can do that in bad economic times just as well as you can in good ones. In fact, recessions generally separate the real entrepreneurs from the ones who’ve just been playing at owning a business. Recessions present some unique opportunities:
The opportunity to practice patience, diligence, and emotional regulation.
Remember what your parents said when you wanted to give up piano because practice was boring? That’s what we’re going to tell you about abandoning the practice of entrepreneurship because the economy is scary.
Don’t try to dodge the recession by going to grad school. Don’t beg for your corporate job back. Don’t stop making your product or offering your service. The world will go on after a recession, and those who lead that new world will be the ones who didn’t give up during the tough times. This isn’t bumper-sticker messaging. It’s the best advice you can get as an entrepreneur — Do Not Quit.
The opportunity to listen to your customers.
“In fast-changing times,” says Logan Lyles of Sweet Fish Media, a rapidly growing B2B media and marketing firm, “it’s *even* more important to listen (closely) to what your customers are saying.” Now’s the time to turn your content marketing approach into a two-way conversation. Start talking with your customers on social media, through podcasts, and in blogs. Email your list and ask for feedback. Text your buyers and ask them to reply. (Bonus tip: Texting your customers is likely to become the single most important communication tool you have). When you know what your customers want, you can provide it for them and keep them buying it.
The opportunity to ramp up your side hustle.
If your regular business slows down during a recession, it’s the perfect time to prototype your new idea. Maybe it’s a recently developed product line, a reconfigured service package, or a whole new LLC in the making. You’ve got the time to work on it now. You know how to run a business. And even if immediate sales are slow, you can get the concept’s structure in place so you can run fast in a few months.
The opportunity to invest in affordable, meaningful technology for working from home.
The future of work is changing. Work from home, online education, and other flexible options will move from the margins to the mainstream in (very) short order regardless of what happens to the economy. That means you’re going to need a home office, mobile office, and maybe a separate location as well, and you’ll want to have the technology you need to stay on top of your work, look professional, and keep your business’ momentum going from all those places.
Most communication technology has grown remarkably affordable in the last few years, and much of it will move from the nice-to-have category into the essential-to-our-business category in the near term. So you can expect work-from-home tech to make an abrupt turn and become more expensive quite soon. You can save money by buying it now.
The opportunity to consider carefully the benefits of taking out an SBA loan.
The government and many banks are practically begging you to take out a business loan right now, and the folks at the Small Business Administration (SBA) are American heroes, working insane hours to pull off miracles. But is a small business loan right for you in 2020? Maybe. You don’t want to make that decision when you feel anxious or after you’ve had a few drinks. Instead, talk to a financial advisor, look at the numbers, and act on the data (not your feelings) so you can maximize your capital and minimize your risk.
4 Strategies for Winning in a Recession
1. Identify alternative sources of revenue.
Relying on one source of income is never safe even in a roaring economy. Diversification can help keep your business afloat during a recession or even a quiet period during ordinary time. After all, you diversify your personal investment portfolio, right? Why not offer the same protection to your small business?
Here are some ideas:
The ideas for diversification are nearly endless.
In addition to creating alternative revenue sources for your business, consider doing the same for your family. If you need cash in your hand right now, then driving for a delivery firm, working at a pharmacy, or offering to sit with a senior adult (if it’s safe) can help you earn some of what you need. Your spouse, partner, kids, or roommate can pitch in and help with many of these options. Whatever you do, don’t haul out your credit card and rack up expensive debt to get you through a few weeks of slow business. Do more work instead.
2. Up-sell existing customers.
It costs five times as much to acquire a new customer as it does to retain a current one. Plus, your current customers will buy what you try to sell them 60-70% of the time, but new customers only buy 5-20% of the time. So customer retention is extremely important during a recession. That doesn’t mean you should call a halt to marketing and sales. It means your marketing and sales initiatives should target your existing customer base more than prospective leads.
If your business is built on a subscription model, you’re already able to take advantage of recurring revenue and your customers’ reluctance to cancel your service. But if you are selling a single product, it may be time to offer your current customers something new because marketing through email, text, and social media is relatively easy once you have a customer base.
3. Don’t quit marketing.
It’s the oldest temptation for business owners in a recession — cut the marketing budget. “We’ll ramp it back up when consumer confidence improves,” they assure themselves. They are headed for disaster.
A recession is the time to double down on your marketing activities. Think about it: your competitors are cutting back on their ad spend, thus reducing noise in your space. Your message can stand out. Plus, marketing agencies and freelancers may cut their prices during a recession, offering you a chance to attract new business on a discount.
Seem counterintuitive? Consider this story:
Before the depression of the 1930s, Post led the dry cereal category. But when hard times hit, they cut their ad budget. Kellogg, their chief competitor, ramped up advertising and developed a new jingle for a cereal that went “snap, crackle, and pop.” By the end of the depression, Kellogg had increased sales 30%, leaving Post far behind in sales.
During a recession, be a Kellogg, not a Post.
4. Start providing services that cater to people’s needs, not their wants.
Billionaire investor Warren Buffet says, “It’s only when the tide goes out that you learn who has been swimming naked.” If you’ve been offering a service that people only want when they feel flush, you may have been swimming naked without even knowing it. The safest, most recession-proof business is the one that meets people’s most basic needs. The farther you move from that position, the riskier your business becomes.
It’s not just making sure your service meets a need, it’s also about how you position that service to your audience. Marketers, sales professionals, and entrepreneurs talk a lot about “delighting” the customer. Make sure, though, that you are meeting your customer’s needs before you consider any delightful extras. In other words, go back to the basics.
5. Apply for financing/line of credit before it’s needed.
This advice may come too late to help in the next recession, but it can be wise to recall when we hit the one after that. The safest investment in a recession is cash. A business that’s sitting on a mountain of cash can survive nearly any economic downturn. If you tend to keep 1-2 weeks of cash in the bank, that’s probably not enough to see you through anything, certainly not a months-long economic tumble. And you need to look for funding long before that time. So get yourself a line of credit, an SBA loan, or an angel investor when times are good.
That said, if you can make it without credit, do it! Borrowing money probably shouldn’t be your first choice. As with anything financial, talk to an objective party with deep experience in small business finance before making a decision about borrowing money. Securing venture capital, however, can help save your bacon without the same risk as a loan or line of credit. Here again, it’s a good idea to sit down with an expert consultant in the area before seeking to raise capital.
How to Help Others During a Recession
At its core, entrepreneurship is about helping other people. That’s how you got started, right? You saw a need, you built a product or service to meet that need, and you marketed it to people at a price they could afford. Keep doing that. If your product is one people need, they’ll keep buying it. If it’s not, well, maybe it’s time to explore some new ideas. If your product isn’t competitive, maybe it’s time to bump up the quality. If your product or service is too expensive for your target audience, now’s a good time for a price adjustment.
While nothing can guarantee a secure future, staying true to the fundamentals of business can help. Serving your customers with great products, fair prices, and a smile can go a long way toward keeping you in business no matter what the stock market did this morning.
In short, you can survive a recession simply by being the best entrepreneur you can be.