7 Ways to Tackle a Business Decline
Feeling a nervous pit in your stomach? Are sales starting to slow or decline? Are you wondering where the market is going over the next few years? You just finished a few years of managing through the pandemic and now it seems like poor economic times are on the horizon. What are you going to do now?
Recessions are obviously scary - they create macroeconomic conditions that feel very hard to control or manage. The key to managing through a period of sales decline is to understand what's driving the decline, manage your cost structure aggressively, and pivot to address changing customer sentiment. In other words, you want to steer the car into the skid, not slam on the brakes.
Your finance team is your best friend.
Cash flow is one of the most misunderstood aspects of business. It’s so important, yet often overlooked by entrepreneurs and business owners who focus more on other indicators such as sales growth and profit margins. If you're not already meeting regularly with your CFO or Head of Finance, now's a good time to get more acquainted. With downturns, things can change dramatically. Set up weekly reviews with your finance leadership and focus on cash flow. I have seen many leaders only focus on sales and miss important aspects of their cost structure. This happens especially when a company increases in size because the list of cost items that seemed small during a phase of growth add up quickly during a phase of decline.
During your weekly reviews with finance leadership, review your program and operational costs in order of return to the business. If the costs are large but they are producing healthy margin, it's something to continue monitoring. However, if the costs are large and you're not generating return, they should go on a list of programs to be potentially paused or cut. Resist the urge to immediately make a decision (unless you're in a dire cash flow situation) and save the list for a discussion with your leadership team later. It can be tempting to overlook smaller cost lines but evaluate their total sum impact to your cash flow because together, they could be big. After the review, work with your finance leadership to determine a percentage reduction you want to achieve a lower risk cash flow profile.
Once you have completed your cash flow assessment, meet with your leadership team to discuss. Review the full cash flow assessment and necessary reductions. Assign the reduction targets and highlight potential areas for program and operational cuts (to give them a starting point). Then give them a defined period of time to develop a recommendation and impact analysis to their cost reduction plan. When they return with their plan, you might find that some of the larger program costs can be reduced significantly through prioritization or delay tactics, reducing financial risk to the business without significantly hampering long term potential.
Invest in direct marketing.
In prior roles in my career, I had to manage through multiple economic downturns. When things get hairy, it's best to have direct control, where possible, over your revenue stream. Recently, my team and I built a direct marketing engine ahead of a significant industry downturn. When the downturn hit, we were better positioned than many of our competitors because we were able to engage and sell directly to our customers instead of relying purely on retail partners (who were more focused their own financial stability). The net result? We more than doubled advance revenue during a time when everyone else declined. You want the same type of control over your revenue streams.
Building a direct marketing engine is no small feat - it takes time and the right resourcing to make it effective. You will need to decide on platform, marketing budget, and phasing for implementation and then work closely with a media agency to execute your media budget efficiently. It's important to note that you'll need to manage the relationships with your retail partners as you add this channel to your business but the two paths to revenue aren't mutually exclusive, you can have successful retail partners and sell directly to end customers. All of these things present challenges but in the end, it's absolutely worth it.
Dive deep into your customer data.
Economic downturns can drive different types of customer behavior changes. Some customers may cut spending entirely. However, more often than not, they pare back to a reduced rate. Or they spend their money on different types of products and services. When sales start to drop, you will best position your business for success by understanding how customer behavior is changing.
If you have a direct marketing engine already built, review your marketing funnel data with your marketing and general management team. Is traffic declining at the top of the funnel? Or is it conversion? Or is it both? If it's traffic, you might need to adjust your targeting and segmentation to find a less price sensitive customer. If it's conversion, then dive deeper to understand where it is declining in the funnel. For example, if your products are expensive, you may have a problem with the customer's ability to pay. Think of this as a blocker that you want to unblock. In this case, offering a financing option could help drive conversion. Alternatively, if you have a product that requires an upfront deposit, you could consider lowering the deposit requirement or making payment terms more flexible.
Granularity of data is important here. If your marketing team hasn't built this level of granularity into their reporting, then now is a good time for them to do that. It's impossible to develop effective solution paths to business problems without having the data necessary to root cause the problem.
Brainstorm a new value-add.
Assuming you dove into customer data, there are a number of options to address common conversion problems. Many teams instinctively discount their core products to achieve better conversion. Sometimes, this is a necessary evil, however there are other options. One great option is looking at value adds to your core product. Instead of discounting your product, you bundle something for free that provides additional value to the customer but at a lower cost than discounting your core product. Additionally, you protect your product line from long term price erosion by bundling the "discount" into a separate product. Look for potential value adds to your core product line to deliver better value to your customer.
Reposition your marketing for a new audience.
When life is good, businesses tend to focus on their core customer base. This is obviously the right thing to do under normal business conditions but when things turn bad, you often need to find new customer segments to fill in the gaps.
Work with your marketing and sales leadership teams to identify customer segment gaps. Based on the addressable market and propensity to pay and convert, you should be able to come up with a targeted list of additional segments to pursue during the downturn. Some of these segments can have less price sensitivity, making them optimal customers in the moment.
Once you have developed a list of segments to pursue, your next step is to build the right marketing or sales campaigns and targeting plans to sell to these customers. Additionally, you can also evaluate packaging or merchandising changes to better speak to these new customer segments. Take Cheerios, for example. It was originally marketed toward children, with bright colors and cartoons on its packaging. But in 2009, General Mills decided to change its strategy and re-brand Cheerios as an adult snack food. They used darker colors and changed the mascot to one that better spoke to an adult audience.
The result? Sales increased by about $100 million annually between 2010-2016!
Try changing or adding new products to your mix.
If you are a product or services retailer, you'll also want to pay special attention to your sales mix. You might see customers shifting towards less expensive products or services. You might be selling fewer bundled products. The higher the price of a product, the more likely it will be affected by a downturn.
Your mix data might suggest a number of different actions. You could potentially add lower priced products to your product line (assuming it doesn't impact your brand promise). Or unbundle accessories from core product lines to give customers more product & price flexibility. Or offer higher discounts for bundled options to drive conversion on the largest revenue generating products. Or add an entirely new product line that better serves the needs of a customer during the downturn period (if it is long enough and there is continued revenue opportunity after the downturn). You'll have lots of options to consider.
This also applies to service-based businesses. Are your services bundled into very comprehensive, but expensive, solution packages? Consider offering your customers bundle options of the most used services or an a la carte services model. Providing flexibility means you'll retain a larger percentage of your revenue than if you lost that customer entirely.
The point is, offer your customers product/service feature and pricing flexibility when pocketbooks get tight.
When competitors pull back, take advantage of the lower media cost structure.
In many of the examples above, we assumed a tight cash flow situation. If cash flow is more flexible, you have an opportunity! In economic downturns, advertising demand often drops, which means media cost structure also drops. This is your chance to get lower advertising costs for your business while other businesses with more stringent cash flow needs pull back on spend.
Review your media spend with your marketing leadership team. Ask if they have traffic segments where they haven't maximized ROI and evaluate whether those segments would be good targets for spend increases during the downturn. Execute a short-term test and then evaluate the traffic and conversion response. If you see better return, invest further. Do this until you reach a point of segment saturation and then hold until ROI drops. During this period, your budget will go further and you'll be able to reach and acquire more customers for the same budget than you would have in the prior period.
Conclusion
Downturns are scary for everyone, but with detailed focus on the core aspects of the business, and some creativity, you can turn a downturn into an opportunity for your business to grow in the future. Address cash flow, build direct marketing, brainstorm and test new value-adds, product positioning and mix, and extend your media budget, and you'll create a plan the team can get behind. If you’re feeling stuck or overwhelmed, Crux Advisors offers services to help you navigate this tricky terrain! Or contact us directly and we can set up an informational call to discuss your challenges and next steps.