Taking Advantage of the Downturn
Unless you have been avoiding your in-box in the past month or so, you probably got the widely circulated email containing “the world is coming to an end” slide deck from a major venture capital firm. The essence of the presentation is that if you survive the current economic meltdown, you win. That means cutting heads and getting to cashflow break-even as soon as possible. The advice is well timed and important, but incomplete. The winners will not just survive this recession—they’ll need to take full advantage of it, strategically and tactically.
On the strategic front, companies should revisit the basic questions they answered when drafting their initial business plans, this time with the words “in this market” at the beginning:
· In this market, who are our customers?
· In this market, what is our value proposition?
· In this market, what is our business model/how do we make money?
· In this market, who are our competitors?
· In this market, what is our competitive advantage?
· In this market, how do we differentiate our product?
· In this market, what are our core assets?
The answers to all of the above (and many more) questions may have shifted in the last three months. If your customers were small start-ups, you may need to adjust your focus to a customer base that has money to spend.
Are there certain companies that might find your value proposition more compelling because of the downturn? Should you refocus your value proposition and messaging around helping customers cut costs? If your business model was based on certain advertising CPM (cost per thousand impressions) rates, those may no longer apply. Your list of competitors may have shrunk or changed, so rethinking what you need (and don’t need) in your competitive feature set is now relevant. Is the next version of your product really what your existing customers want, or is it what potential customers wanted but no longer can afford to buy? Your existing customer base now may be your core asset, rather than your intellectual property.
To win, your strategy needs to be appropriate for the new market dynamics. Big companies cannot be as nimble as small ones, so smart entrepreneurs should be able to take advantage of thoughtful, but swift, changes in strategy.
Tactics are also critically important, but shouldn’t be confused with strategy. Cutting your burn rate is a tactic in a downturn, but it doesn’t lead to success unless the company also has the right strategy to go along with it. The companies that came roaring out of the last technology downturn not only had exceptional survival skills but, more important, they had a superior product focus and business model.
On the tactical front, the much-circulated VC presentation mentioned earlier pinpointed the major one: cost-cutting. Financing in this market will be much tougher, so increasing your runway is essential for survival. CEOs should scrutinize every expense item and try to renegotiate every contract. That said, cost-cutting is only one of many tactics that companies should consider. Tactical opportunities exist on the upside in this market as well.
· Hiring. There will never be a better opportunity to upgrade the quality of your team. Start-ups that are well funded and well positioned should have the pick of the litter when it comes to new hires and upgrading talent. Employees may be more flexible on compensation packages than they were several months ago.
· Marketing. Media always gets cheaper in a downturn, which presents a unique opportunity to acquire customers profitably. If the lifetime value of your customers has remained stable and now you are able to acquire customers for less than their lifetime value (through inexpensive media), you can make a killing in a difficult economy. Classmates.com is a wonderful case study. When the technology bubble burst in 2000, Classmates.com was able to buy Internet display inventory for a fraction of what it had cost earlier. The company knew what a customer was worth (more specifically, what a customer would pay for a subscription) and, therefore, how much it could spend to acquire that customer. The team at Classmates.com was maniacal about tracking conversion rates and focused on buying display media only if it met company goals for conversion. Does your business model enable you to take advantage of less-expensive media? Publishers with undifferentiated inventory should have an especially difficult time selling inventory. Look for screaming deals!
· Tying Expenses to Performance. In a down market, you may have the opportunity to link your cost structure specifically to performance. Tying employee compensation to performance criteria is the obvious example. On the marketing side, as publishers lose leverage, they, too, are more willing to sign performance-based or CPA (cost per action) deals, instead of CPM deals. No publisher is going to announce it, but companies should be persistent in asking for it.
· Pricing. Aggressive pricing can be an important weapon against weaker competitors who cannot match your prices or will eat into their cash balances if they do.
· Mergers and Acquisitions. Even some attractive companies with strong IP or a large customer base will struggle to make it in this environment. Banks are not the only ones who will be looking for good M&A deals. As a buyer, some questions that you might ask include: Would an acquisition be relevant to your new strategic focus, or would it dilute your focus? How long will it take this acquisition to get to positive cash flow? Are you buying people, technology, revenue, or customers? How hard have you scrubbed the projections? How will you finance an acquisition in this market?
No doubt the current market presents added challenges, but it also offers new opportunities for those companies looking to do more than just survive. The companies that refocus their strategies in light of market realities and creatively consider the tactics they employ will be in the best position to win when the economy starts moving again.
