Saitej has over 12 years of experience in Project Management. He has worked with J.P. Morgan and Siemens Ltd. and is currently working in the SaaS Industry.
The world economy goes through cycles of economic upturn and downturn. A novel approach is required to tackle economic downturns. An economic depression engulfs businesses globally cutting across all sectors. The crisis ends up in the freezing of worldwide credit, a fall in demand for goods and services, low investor sentiment, supply chain disruptions, and uncertainty for businesses. Central Banks across countries intervene so as to mitigate the impact of the crisis and governments give out stimulus packages to bail out businesses.
The impact of a worldwide financial crisis is wide and has far-reaching consequences, leading to unemployment, reduced consumer spending, changes in the investment patterns of organizations, and creating liquidity issues for businesses. Economies across the world can turn the crisis into an opportunity by targeting growth in infrastructure projects, providing easy credit access to small and medium enterprises, investing in upskilling of the workforce, and increasing spending in rural areas.
A global depression severely impacts business growth. While some companies struggle to grapple with the impact of the recession, there are others that defy the trend. Here are some tips to spot successful business strategies to reduce the vulnerability of companies during a downturn, overcome the impact of the economic downturn, and ensure that corporations are in a leadership position when the economy recovers.
Management Guru Ram Charan in his book “Leadership in the Era of Economic Uncertainty” states that “We won't know once we have turned the corner, and that we cannot envision the form and scope of the world that may emerge. What we know for certain is that this is often a time of tumultuous change and with change come both danger and opportunity.”
Ram Charan suggests some practical actions given below that companies must undertake during difficult times:
1. Protect cash vigilantly and use the cash more efficiently
It's essential for leaders to act quickly and to be prepared for the worst possible scenario. Leaders have to take a practical view of the prevailing situation and should not be anxious by misguided pessimism. Companies must make sure that the yardstick of performance is income and not revenue growth. Organizations shouldn't evaluate projects on the premise of return on investment but on how soon they will lead to cash returns.
2. Use ground intelligence to survive the storm and position businesses to thrive in the aftermath
Use ground intelligence to survive the storm and position businesses to thrive in the aftermath – Organizations should create a greater value proposition for their customers during a recession. Products should be redesigned to suit the consumers better during changed conditions. Organizations have to develop better relationships with their customers to survive the downturn.
3. Develop a better understanding of customers
Salespersons should provide ground level-intelligence that forms the premise for fundamental decisions regarding the company’s strategy and tactics. Salespeople are in direct contact with customers and know customers over anybody else within the organization. Hence a frontrunner should turn the sales team into skilled agents whose reports form the premise for fundamental business decisions.
4. Re-evaluate your pricing strategy and capital expenditure
A volatile market environment requires a versatile pricing mechanism. It's essential for organizations to figure out with their suppliers and have a win-win relationship because of a decline in sales volume, the charge is spread across lower volume, and corporations are tempted to increase prices. But the rise in prices of products will result in customers shifting to competitor's products. Hence companies must find the proper price point for their products that are sustainable.
5. Use cost-cutting strategically
Organizations have to devise cost-effective methods of selling their products. A corporation shouldn't stop providing funds to its Research and Development (R&D) department as this might make a company prone to lagging behind its competitors when normal conditions return.
Marketing Perspective to Ride the Downturn
According to Quelch and Katherine E. Jocz (2009) in a recession everybody cuts costs but not providing adequate support to brands will affect the performance of the product. Companies should understand that new customer segments emerge during a recession.
The authors have segmented customers into four groups based on the emotional reactions of customers to the economic environment. The customers are divided into four psychological segmentations:
- Slam on the brakes segment – This group reduces spending by eliminating, postponing, decreasing, and substituting purchases of products. Lower-income consumers typically fall in this group and if there is a drastic change in circumstances then even higher-income customers tend to fall in this category.
- Pained but patient – Most of the consumers fall in this segment and represent people who have not been affected by unemployment. The consumers in this segment are optimistic about future prospects for recovery in the long term. Like slam-on-the-brakes consumers, people in this segment reduce spending but less aggressively.
- Comfortably well-off – Consumers in this segment are not perturbed with the future of the economy and consumption is near pre-recession levels but the consumers make more selective purchases. This segment consists of people in the top 5% income bracket and also those who are confident in their financial stability.
- Live for today segment – The consumers in this segment are young urban and respond to recession by extending their timetables for major purchases.
Consumers generally prioritize their consumption of products and services into four categories:
Essentials – Products and services that are essential for survival or perceived as central to well-being.
Treats – These are indulgences whose immediate purchase is considered justifiable.
Postponables – These are needed or desired items whose purchase can be reasonably put off.
Expendables – These are perceived as unnecessary or unjustifiable.
During a downturn consumers re-evaluate their consumption priorities. Spending on restaurant dining, travel, arts, and entertainment easily shifts in consumer’s minds from essentials to postponables and even expendables. Consumers become more price-sensitive during the recession and even loyal customers shift to cheaper or alternative products. Firms that understand consumer psychology during the recession and make marketing efforts and products accordingly are most likely to prosper.
Managing marketing investments:
Organizations need to realize that loyal customers are the most important source of cash flow and organic growth. Businesses need to distinguish between necessary expenditures such as marketing which is essential for key customers and wasteful expenditures. Business risk can be reduced by building and maintaining strong brands which customers trust.
Assess opportunities – Organizations need to determine which brands will survive during and after the recession. Success will depend on how a company categorizes its products and services to suit all the four segments of customers – slam-on-the-brakes, pained-but-patient, comfortably well off, and live for today. Companies need to part with brands or products that are ailing.
Allocate for the long term – Companies should not take decisions in haste and alter a brand’s fundamental proposition if sales decline. If marketers tamper with the value proposition of a product and position the product for down-market consumers the loyal consumers feel alienated and switch to the competitor’s brand. Instead, organizations should increase their advertisement expenditure and capture market share from weaker rivals.
During a recession, firms with large cash balances should make cost-effective acquisitions and strengthen their brand portfolio. It is also essential for companies to come out with new products even during a recession.
Balance the communication budget – During the recession, the share of the advertising budget for broadcast media typically shrinks and the budget for direct marketing campaigns and online advertisements grows. If companies ignore broadcast media the out-of-sight brand moves out of customer's minds and customers shift to rival brands.
Advertising during Recession
John A. Quelch and Katherine E. Jocz (2009) have given 7 Smart ways to Economise on Advertising:
1. Shift from 30 seconds to 15 seconds advertisement spots.
2. Substitute television advertising for cheaper alternatives such as radio advertising when it is important to deliver frequent messages in order to remind consumers to act.
3. Switch to media that target consumers preciously an example is that of google advertising.
4. Advertise brands jointly i.e with a marketer in a different product category targeting a similar customer segment.
5. Extend an existing campaign rather than commission a new costly one.
6. Consolidation of advertising to a single media agency to maximize receiving media discounts.
7. Avoidance of long-term media commitments during a downturn.