You can’t watch the news for more than five minutes these days without hearing predictions of a recession—war in Ukraine, tightening of credit markets, global supply crisis, et cetera. When consumers get wind of these adverse events, they begin a cycle of economic decline:
- Consumers get nervous so they spend less,
- Businesses make less money than they did before,
- Businesses slow hiring and/or lay off employees,
- Which makes consumers nervous so they spend less…
- … and the cycle continues.
This is bad right? Doesn’t this mean that once a recession starts it never ends? What should businesses and individuals do when facing a recession?
Well, it turns out that a recession creates entrepreneurship opportunities for both companies and individuals, and that these entrepreneurial activities can lift us all out of recession and back to a period of prosperity.
Entrepreneurship in a recession
What do Airbnb, Revlon, Fedex, Hyatt, and Disney have in common? They all took advantage of opportunities created by a recession. How did they do it?
- Airbnb started during the 2007-2009 recession when Brian Chesky and Joe Gebbia were so broke that they wanted to sublet air mattresses in their SF apartment in order to make rent.
- Revlon was born during the worst recession of all, the Great Depression of 1932. The founders (Charles and Joseph Revson) recognized that, during troubled times, consumers look for small, affordable luxuries. They might not be able to afford a vacation or new clothes, but they could certainly afford lipstick and nail polish.
- Fred Smith started FedEx in the midst of the crushing 1973-1975 recession. Because of the economy at that time: he was able to buy bargain-priced airplanes and delivery vans, and he had a wide variety of skilled, unemployed talent to choose from.
- Similarly, Hyatt started when the Pritzker brothers bought a motel near LAX. They bought it inexpensively during the Eisenhower recession, realizing that once the economy picked up again, they would quickly recover their investment.
- Disney also started during the Great Depression, right after the stock market crash of 1929. Walt Disney realized that in a time of immense financial stress, people needed a whistling Mickey Mouse to make them smile.
- And there are many more! Netflix, Uber, Trader Joes, Microsoft, Sports Illustrated, MTV, GE, and the list goes on.
Recessions also create opportunities for existing companies. A Harvard Business Review article from 2008 reports that recessions tend to “reshuffle the deck” competitively. Meaning, 20% of the bottom performers in any given industry will become top performers, and 20% of the top performers will become bottom performers. This is a shocking statistic. It essentially means that, during a recession, you must innovate otherwise you’ll be surpassed by your competitors.
A recent example of this is what happened to the video conferencing industry during COVID. What did you use before COVID and what do you use now? I’d venture to guess the answer to the former is either Skype or Google Hangouts, and the answer to the latter is Zoom. Why? Because Zoom invested in developing a better product experience while Skype rested on its laurels.
What Advantages Does A Recession Provide For Entrepreneurs?
1. Less competition for talent
Since many companies slow hiring during recessions, it will be easier to find high-quality talent without breaking the bank.
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2. Lower startup costs
In most recessions (with the exception of the current one), prices of everything tend to fall. In ALL recessions, however, prices of durable assets tend to fall, making long-term investment particularly affordable. Why? Because when companies go out of business, there will be more supply (they have to sell off their assets) and less demand (they aren’t around any more to buy anything).
3. Consumer trends
Most people think that during a recession, individuals and organizations will spend less. That is a dangerous oversimplification. In reality, they’re paying more attention to their expenditures. This can be a good thing for entrepreneurs because during normal times, people tend to fall into a routine where they buy the same things that they always did. Whereas in a recession, they are forced to pay more attention to the value they’re getting versus the money they’re spending. So if you have a better mousetrap, people will be much more likely to listen to your message and try your product.
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4. More motivation
Stability breeds complacency. A recession that threatens your job might be the “kick in the butt” that you need to motivate you into putting in the extra effort to start that new business.
5. Trimming the fat
This is the corporate version of #3 and #4. If you’re a business owner, you probably have some employees that are underperforming, but not badly enough to warrant firing them yet. With a recession, you now have to take a harder look at every dollar you spend. Additionally, you now have a legal reason to lay off underperforming employees.
Once the fat is trimmed, you now have freed-up resources that can be redirected to more productive uses, such as product investment.
Ok, So What Should I Do Next, Exactly?
There is no single strategy that will work for all but here are some suggestions.
1. Take advantage of the aforementioned opportunities now
In the above section, we provided you with 5 advantages that a recession provides for entrepreneurs. Don’t forget them! Look for low cost talent and assets, pay attention to changing consumer needs, and don’t procrastinate.
2. Focus on changes in consumer behavior, or else
Zoom recognized that, as more people work remotely, they’re going to need an easy-to-use, reliable video conferencing service. The needs of this “professional consumer” would be much different than the needs of a consumer Skype user who uses the service only occasionally to talk to their cousin in Poughkeepsie. Then when COVID hit, practically everyone was working remotely, and Zoom’s product fit that need far better than Skype did.
How will your customers change their behavior during the next recession? Does your product serve that new behavior? If not, you have to invest or else a competitor will.
3. Don’t be afraid to invest
Of course it’s hard to justify increasing investment when spending is down. But as we mentioned in #2, the costs of NOT investing could very well be catastrophic.
Final thought
As we mentioned before, recessions tend to “shake things up” in every industry. This is particularly true in the current, looming recession because consumer behavior is changing so rapidly. Consequently, we all need to ask ourselves, are we positioned to succeed or fail during this shake up?
If you’re not sure, please feel free to contact us at [email protected] and we’d be happy to help you figure it out.