Is Your Business Recession Resistant? Use These Four "R" Rules to Get Prepared
The big R may, or may not get here this year. But the time to prepare for a down cycle is before it hits.
Executive director, Ed Kaplan Family Institute for Innovation and Tech Entrepreneurship, Illinois Institute of Technology
Any startup entrepreneur can tell you that customers are hard to come by and painful to lose. If you're quietly leaking customers out the back door while you're frantically trying to attract new ones every day, you're just treading water, going nowhere. Believe me, you're not gonna make it up in volume. Good gets better, bad gets worse. Business models that don't make sense rarely have happy outcomes. Low customer acquisition costs may be seductive, but they can quickly lead you astray. Because success isn't automatically or inevitably about more customers; it's about attracting and retaining the right customers. There are some customers that you'd just as soon do without (bad bets, high maintenance, low margins, etc.) although you don't necessarily know that from the start.
The smartest business builders will tell you that not all customers are equal in value or importance even if they're not "bad" customers. They'll tell you that that, early on, you need to focus on customer quality and loyalty, not merely quantity; that it's ultimately all about building the right audience and not just an indifferent stream of crappy traffic; and that customer segmentation and selective, carefully focused attention is critical in the early stages of a company's development. Because you're dealing with scarce resources; because authentic engagement is essential; and because you absolutely need to make every dollar count.
Any smart investor also knows that one genuine dollar paid by a real customer (forget the freebies) is worth five or 10 times the same dollar raised from an investor. Or, frankly, even a million dollars raised from some overexcited VC who's all about momentum, and selling the "story" and who's not paying attention to the underlying metrics which will ultimately make or break the business.
There's not enough money in the world to prop up a bad business in perpetuity or to continue to hide economics that don't make sense. This is why virtually all of the "we'll send you goodies in a box" subscription businesses (Birch Box, Blue Apron, Loot Crate, etc.) are rapidly disappearing or being written off by the desperate bricks-and-mortar guys who invested in them. Nordstrom bought one of the early players, the Trunk Club, at a ridiculously-inflated price before the real world came along and started popping the balloons.
We're starting to see that the early, indiscriminate growth of flash-in-the-pan businesses is fading and they're not going to have the fundamentals or the base of recurring revenues driven by satisfied and profitable customers to get over the next round of bumps, which sadly seem right around the bend. The "R" word is everywhere you look and part of every financial conversation, and things are quickly getting dicey in startup world.
I've been thinking about four other "R" words as guideposts for the hunkering down that the guys and gals who want to stick around should start doing right about now. In fact, if you haven't already started trimming the sails, cutting incremental expenses, and working on protecting your current customer base, you may find that you're too late to make all the necessary adjustments without cutting a lot closer to the bone than you'd like.
Here are my Four Rs:
Relationships: Move immediately to protect and secure the people presently in the boat--existing customers are the most accessible, nearest to reach, and hopefully the easiest to hang on to.
Reassurance: No one wants to be left holding the bag when the boss asks why they're spending a bunch of bucks with your business or service. This means your job now is to be certain you've provided your advocates the necessary ammunition and justifications to make the case for keeping you.
Raise the Bar: Your customers' expectations are constantly rising and the competition for their attention, time and dollars is also constantly growing. You need to be doing everything possible to up your game and to be there (meaning, anytime and anywhere) when they're ready to buy. Reacting to requests isn't enough anymore. You've got to be discovering and anticipating their needs and desires.
Retention: Too many businesses today take their customers for granted and don't spend enough time and money on retention, which is a lot better investment in tough times than trying to recruit new customers. There's a lot of science to managing the emotional levers and behavioral drivers of your customers, but you've got to commit the people and the necessary resources if you are serious about getting the job done.