Surviving Bust 2.0 - Success in a Downturn

Yesterday, I wrote that the current boom being experienced in the tech sector is about to come crashing down around us. To be honest, I didn’t anticipate the level of passion the article would stir up. There were a good deal of experienced opinions shared at ycombinator, and I may revisit the topic again soon.

For now, indulge the point I was making; is there anything that founders can do to isolate themselves as much as possible from the negative effects? Is it possible that even in a downturn, a particular company could find a level of success?

Of course it is. Back when the sector was hit hard in 2000, there were companies that managed to survive and grow. Even in a full on recession, the economy doesn’t stop. Knowing how to position yourself to take advantage of change will be key to your startup’s success in 2008. Even if I’m wrong, and the expected bust fails to materialize, following the advice here will give your organization better resistance to changing realities.

Understand Your Market

In a downturn, what will happen to the way your customers think? If you take a look at what’s happened in previous recessions, you can accurately predict the effects on your company. Traditionally, the mindset of a consumer changes in the following ways:

1. People pay more attention to purchases - Your consumer will be more critical of the value received from your product. This is especially true if your consumer is an advertiser. What you’ll need to demonstrate is a value for money that places your product high on the “need” list; the less likely your product - or the price of the product - is classified by consumers as a luxury they can’t afford.
2. People look for optimization rather than expansion - Your consumer is going to start looking to get more use out of what they currently pay for. It’s going to be difficult to launch a new product that requires a large investment. Instead, take a look at ways you can improve something a customer already uses for a smaller investment. Now is the time to check out the competition and see where you stand compared to them.
3. People act like the recession will last forever - Your customer will start to look at buying things in smaller amounts and lower price points. It’s more attractive to buy less of a product than more, even if buying more is a better value. Retaining the money in hand is a more pressing concern.

Play the Right Hand

If this is how your customer is thinking, you’ll need to position your startup to take advantage of their concerns. You can do this by adjusting your company as such:

1. Make sure your product is “real” - “Real” products address “real” needs. You’ll need to establish that your customer can’t live without your product - especially not now! Chances are, if you have end users that are already paying to use your product, this is a matter of perception. It’s time to focus on marketing: what does your product offer that others do not? What will the customer lose if they stop using your product? If you look at a company like 37signals, their products address needs that are perceived as essential. It’s doubtful that a Basecamp customer will cancel their subscription when they’re worried about their own sales. If you make your money from advertisers, take a look at what attracts them to your site specifically. How will you be able to prove to them that $10 spent with you is worth more than $10 spent with a competitor?
2. Offer efficiencies and savings instead of new features - Show the actual value in your product to your customers. How much time is it saving them? How much more expensive would it be for them to go elsewhere? If you know, spell it out for them. If you don’t, find out. Even better, look at your own efficiencies - are you doing things as best you can? Can you do them cheaper? Now is a great time to look inward and improve processes.
3. Focus on retention - In a down cycle, it’s difficult to translate a stay and hold mentality into a new sale. Because of this, put some extra effort into those customers that aren’t as happy with your service as they should be. Don’t let them become someone else’s win. Solve their issues, address their concerns, and put them back in your safe column. It’s the easiest sale you’ll make, and it’ll be easier to do now than when the market is up.

Things to Avoid

There are certain sure fire ways to ensure your company will implode as soon as people start to get jittery about their money. When you’re adjusting to survive, be sure to stay well clear of the following traps below. A special note however: If you happen to fall into one of these categories as a result of your deliberate strategy, it doesn’t need to be lights out. You just happen to be in a space that is particularly vulnerable, and you’ll need to be extra careful at the moves your organization makes.

1. Ad-based revenue models - One of the easiest cost savings a company can make is to cut its advertising budget. When this happens, you better be sure ads aren’t your only source of revenue. In 2000, almost all of the companies that went out first were those that relied on pay-per-click banner ads as their only source of income. It would be very optimistic to assume that more than one or two of our favourite multi-million dollar sites will be around in five years. Odds are that your startup is nowhere near their level. You may be able to mitigate the loss of ad revenue from switching to a pay-per-action model,- since the advertiser can then see real numbers - but overall it’s not a situation you want to be in.
2. Being recreational or “fun” - When people start to worry about their money, they reduce spending on leisure activities. In the depression, people were so concerned about making money that they actually took on extra jobs instead of having fun, which as seen as frivolous and risky. I’m not suggesting recessions are that bad, but staying out of this market is a good way to avoid being hurt unnecessarily by a slowdown. Admittedly, this isn’t a huge concern, but it’s something to keep an eye on.
3. Innovate at your own risk - In general, innovative ideas are going to be a tougher sell. The one area though where innovation will work is where it provides measurable efficiency improvements to the consumer. Case in point: Google. Releasing a search engine that provided a better result to the end user - saving them time - allowed Google to ignore - even capitalize during - the last market slip.

It’s About Good Business

An economic downturn is a time to separate the wheat from the chaff in business. Your startup will need to survive the harsh realities of stingy consumers and ruthless competition. You’ll do it by focusing on real needs, and improving results to the problems that don’t go away.

Recessions and crashes don’t do much except eliminate ideas that are purely based on speculation. If you can ensure your startup focuses properly, you’ll have no problem building a solid organization. If anything, you can rest assured that if your idea can survive and be fruitful in a recession, it will most certainly cruise through an upswing.