This is a real risk of doing business and there is no magic strategy to totally avoid the repercussions if the economy tightens and a recession hits. The only thing we can do is prepare for it and make sure that if it happens we won’t lose everything we’ve worked so hard to build.
What type of business are you in and how will a recession effect the number of customers out there? Is your business a “nice to have” or a “have to have”?
Grass isn’t going to stop growing. Pipes aren’t going to stop getting clogged. Heaters aren’t going to stop needing maintenance. Things are never going to stop getting dirty. Students will still keep going to college out of state.
When a recession happens two things happen, people cut out the “nice to haves” and real estate and construction related activities slow way down.
If you are a realtor you are at risk because less homes get bought and sold. If you are a construction contractor you are at risk because less construction projects get approved and get started. If you remodel basements you are at risk because people aren’t going to put $50k into their basements when times get tough. If you are a moving company you are at risks because less people move. If you are digital marketer you are at risk because less people are going to spend money on marketing when they are struggling to make payroll. You get the point.
Are these businesses bad because they are more of a risk? Absolutely not! Should you avoid these businesses because they are cyclical? Absolutely not. You should chase opportunities that present themselves. You just need to be smart and be aware that the good times don’t always roll. The people who think they do end up losing it all. We’ll talk about how to be careful in a minute.
Should you grow as fast as possible now so you can absorb the loss later?
I read an article that made the argument that a larger company can absorb a pullback easier than a smaller company. Lets frame a hypothetical situation:
Lawn care companies A and B.
Company A has 50 customers and he’s the owner operator. His costs are low because he doesn’t have any employees and no office.
Company B has 500 customers. 4 crews. An office. The whole 9 yards.
Recession hits and each loses 25% of their customers. For company A thats 12 customers. For B thats 120 customers.
Who will survive?
The article argues that the larger company has more expenses to cut, can lay off some employees, and absorb the loss and is thus more likely to survive. Company B however has nobody to let go and no way to cut expenses and is more likely to die.
I disagree with this logic. I don’t think it has anything to do with size. Yes its hard on the small guy because he can’t cut expenses. But it’s also hard on the big guys because as you grow the amount of variable costs decreases. The only thing you can cut is the labor. The rest is not variable at all. The truck payment. The mower payment. The insurance. The trailer payment. The warehouse space. The office lease. The debt service on the line of credit you used to finance the growth.
It’s not as simple as losing a big chunk of your business and just cutting down on some labor to ride it out. They might not be able to pay the rent in the office. They can’t pay the office admin staff. They can’t make the truck payments. The overhead might cripple them.
If the sole proprietor is living above his means and has an expensive house and a shinny thing habit he’ll fail just as easily.
It’s not about size at all. Everyone is at risk. It’s about healthy growth. We’ll talk more about that in a minute.
Should you diversify?
Many people say the best way to prepare is to diversify. Offer a few services to a wide range of people so if something changes you won’t be hit hard.
That goes against a lot of what I know about business. You build a great business by getting really good at targeting a single type of customer and designing a service for that specific type of customer.
If you are in a high risk niche like construction or another “nice to have” businesses that slows down when the economy pulls back you just have to prepare and be careful. Don’t branch out for the sake of branching out or you won’t be good at anything. You can lose focus and open yourself up to an entirely different range of risks.
If you are at risk you just have to recognize that and be ready. Instead of diversifying you need to prepare. Lets get into that.
Everyone will lose some customers from time to time.
How do we help offset the risk?
Don’t compete on price in the first place. Target customers who are willing to pay extra for a higher quality service. Don’t scrape the bottom of the barrel and compete with the Craigslisters and fly by nights. The people who hire those types of services won’t have the money to keep paying for the services when the going gets tough.
The high end clients who are paying for your service won’t be buying a lawn mower or doing things themselves when the going gets tough. They’ll keep on as usual and you’ll keep the clients. Higher end clients are more likely to stick with you even if the economy gets rocky.
Think about who your clients are. Are they likely to start doing the cleaning themselves and no longer pay for it to get done?
If you go after the right clientele the answer is no. They’ll still pay the cleaner. If you go after the price shoppers and the bottom feeders then yes. They’ll stop paying the cleaner and start doing it themselves.
The customers who are paying extra for the great service will stick around and you’ll be able to weather the storm a lot easier.
Another way we can make sure the damage is controlled and we keep more customers is by really bringing the value. If you treat your customers right and they are loyal fans of what you do they’ll be a lot less likely to jump ship when the competitors start lowering prices and competing hard to take your business. Develop a personal relationship with them. Make sure your crew leaders are friendly and exude eager professionalism.
Remember that business is emotional and you aren’t just selling a manicured lawn. You are selling a feeling. You are selling an experience. If you work with my company this is the feeling we will give you when you pull up to your house. We’ll cater to your needs. We are trustworthy. You can feel at ease. You are safe with us.
There is a saying people never buy a drill bit because they need a drill bit. They buy a drill bit because they need hole in the wall. Figure out what that deeper need is and push those buttons.
If they like you and your people as people they are less likely to leave you. They need to enjoy doing business with you on an emotional level.
Keep your expenses as variable as possible.
If things slow down you want to be able to cut your costs drastically on your command. That means keeping costs variable and reducing overhead. You can’t change your mind and stop paying on a 5 year office lease. You can’t change your mind and turn in your leased vehicle. You can’t change your mind and recoup your costs on the brand new equipment you financed.
There are two people you can’t get out of paying every single month: the bank and your landlord. In the early days don’t deal with either if you can help it.
When you hire employees be upfront that if things get slow hours will be cut back.
Avoid recurring costs that aren’t flexible. Don’t make long term commitments or sign long contracts. When Richard Branson started Virgin he bought his airplanes from Boeing with a clause that said he could return them if his business struck hard times.
Ask the million dollar question for each significant investment.
Is there a way for me to spend less money on this purchase and still get the same return?
Will a $5k cargo van accomplish the same thing as $25k cargo van?
Will a used pressure washer for $2500 accomplish the job the same way as a $5000 new one? Great, now you have $2500 to put towards marketing.
Will a new lawn mower for $12,000 make me $6,000 more dollars than the $6,000 used mower? It sure won’t. It will only increase my overhead and I’ll have to eat more depreciation if I’m forced to sell.
The math almost always points to buying equipment used.
Don’t buy into the image fallacy
You don’t need a nice car to get clients. You don’t need a $2k suit to get respect. You don’t need a shiny new mercedes sprinter van to gain trust from customers. You don’t need an office with high ceilings and a kegerator next to the ping pong table. You don’t need to entertain and spend money on fancy restaurants for your employees to be committed.
Customers are after value. They are after speed. They are after professionalism and fairness. They don’t care what your monthly payment is on the truck that shows up.
Employees are after a voice and respect. They want to make a difference. They want you to care about them and how they feel at the end of the day. They want you to listen to their opinions. They want you to set them up for success. They don’t care how swanky the office is or about the meals and entertainment you splurge on.
Outsource your weaknesses
If it isn’t in your wheelhouse then don’t take on overhead to get it done.
Get really really good at what you do best as a business and focus your energy there. Outsource the marketing (sometimes). Outsource the billing. Outsource the payroll services. Outsource the admin work. Outsource the compliance. Outsource as many non essential business tasks as possible!
Don’t hire a full time employee to do something a freelancer can do on a month-to-month contract.
Month to month contracts are flexible. You can terminate them and take it on yourself if things get slow. If you hire an employee on the other hand that is payroll that you will need to cover on a monthly basis no matter how things are going.
Market like a guerrilla
Get creative and get in front of your customers physically. Flyers, yard signs, sidewalk chalk and even door to door marketing can work great. Network with individuals who often recommend your services (realtors for home services for example).
Lean out your life
Yes I know I know life is meant to be enjoyed. I’m not asking you to live with a painstakingly frugal mentality forever. I love a nice restaurant just as much as the next person.
There is no ROI on lifestyle expenses. There is no future profit on the nice car. There is no future profit on the expensive house (besides a little bit of appreciation to offset massive amounts of debt service). There is no return you get on the expensive dinner. Its all overhead. Its all money that is gone that you will never see again.
So if you are working on growing your business don’t fall victim to lifestyle creep. As your income rises keep your expenses steady so you have more funds to invest when opportunities present themselves. Don’t finance the new Audi after a few profitable months. Don’t buy the house with the extra bedroom you don’t need.
When things get hard during a recession it will put a ton of pressure on your business when the money is flying out the window in your personal life.
That is how you recession proof your business and your life.
If you do it you’ll be the one with money when the recession happens. You’ll be able to make investments. You’ll get real estate cheap. You’ll get great talent cheap. Marketing won’t be as competitive. You’ll be ready to double down and grow like crazy on the way out of the recession.
Get after it.