Do we have a recession now – or will we have a recession soon? It is not certain, but very likely to happen in the coming months. The R word is scary and it starts changes in economic behavior. Recessions are a normal part of the business cycle, painful but necessary. Let’s think about the cycle of a recession. They begin with a trigger, like 911 or Covid 19, or high inflation,etc. Then companies cut back and when people lose their jobs, they tighten their belt. They stopped spending when people in the companies stopped spending. Obviously, the economy shrinks and when the economy shrinks and unemployment rises, the government steps in to lower interest rates. When they lower interest rates, Government spending increases. Magically the economy starts to expand and a new era of expansion begins.
So what do you as a business owner have to do to keep revenues flowing when spending slows down? Besides preserving cash – what’s the best way to outwit a recession – lower pricing, right?
And that’s exactly the wrong thing to do if your long term goal is to build the value of your company, because lowering your price is like competing a race to the bottom. So you lower your price and what does that do? It lowers your margins, of course. With lower margins, you get a weaker point of differentiation. You just have less money to invest in sales and marketing, which means your offering is not as well differentiated. You will reduce your budget away from sales and marketing. You’ve got a weaker point of differentiation, while you lower your monopoly control score. What is your monopoly control score? It’s the way we measure how well differentiated your offering is.
Why is it that another company would want to acquire your business? Well, they’re making a build versus buy decision, right? They don’t tell you this- but they go into a boardroom. And they say “Should we buy this company because they’ve got something unique? So what differentiates this company and will take us years to replicate? Or are they selling a commodity service or product in which case we can simply lower our price and compete with them. There’s no reason for us to buy them since we can simply pick up their business by competing with them on price. We’re a larger company so we can outlast them the price war. The conclusion is: There’s no point in buying this business.”
This why businesses that are highly commoditized and competing on price, very rarely sell. If they ever do, it’s at a low value. And so while you may win the battle of more sales in the short term, lose the war. The war is that you dropped the value of your company just to keep treading water on this treadmill to nowhere. So lowering your prices in reaction to a recession is exactly the wrong approach to value your company in a turbulent economy.
The right way is something called Step change Thinking. So step change thinking is changing the way you could run your business. Today a step change improvement to value proposition in the marketplace is something that is a far better solution. Find out more about Step Change thinking in this free ebook: growpn.com/YesBoxEbook
This solution worked for several companies who started in a recession and today are multi-billion dollar companies. Try it out – you could come out of the recession as a much stronger company.