How To Navigate The Lean Years
Things are Going to Get Tough
Instead of writing a post about the upcoming (or already
here)”recession,” I thought I would go a bit broader and talk about how
to navigate the lean years. Businesses of all sorts go into this time
under a lot of stress.
Let's be honest, I'm not an economist. I have no idea if the season we're about to enter is a recession or has some other name.
But I am a business coach who has worked with hundreds of owners and this isn't the first time that things get “tight.”
What We Know About the Lean Years
I don't know exactly when this brilliant observation was made to me
but it was early in my career when we were raising funds for one of my
early startups. Here's how it went:
In good times features become products and products become companies.
In tough times companies become products and products become features.
Think about that for a second. In the lean years we see a lot of tuck
ins. Companies buy other companies and leave them operating as products
(instead of companies). Or integrate them as features in their existing
product line.
But what do you do if you don't really want to be acquired? What's the strategy?
That's what we'll dig into here.
The Housing Market Metaphor
In my last post I wrote you a crazy example about buying a house. I was talking about premature optimization
when I told you that it would be insane to reject buying a house that
works for you today simply because it might not be perfect for you in
the future.
Let's continue with the metaphor. But first, a little bit of data and context.
I grew up in Southern California and went to college in Northern
California. In other words, other than the fact that I've spent the last
two and a half years in Houston, Texas, I'm a product of California
(for good or bad).
So lets look at the California (and West Coast) housing market. Check out this image that comes from a 20 year review of home prices.
In every one of the cities highlighted, property values grew over
time, faster than the US average. And compare that to property values
over the same period in Michigan, Ohio, Indiana, Illinois and Wisconsin.
They didn't appreciate as fast.
If we were trying to grow our wealth (given that our home often
represents a significant part of it), we'd likely invest in some areas
of the country, and not in others. Right?
In California, what I experienced (and participated in) was buying a
house I could afford, waiting a few years, selling it (at a much higher
valuation), and then buying the next house (larger) that I could afford,
and doing it again. And again.
The approach won't make you rich in a day, month or year. But it will
significantly increase your wealth once you sell that 3rd or 4th home.
Today I want to talk about a similar strategy that won't drive an
immediate increase in your near-term revenue, but it's an approach that
will leave you in a much better place downstream.
And trust me, it has nothing to do with real estate.
The Two Jobs You Have in a Recession
Any time you lead a business in a recession, or lean times of any
sort, I believe you have two jobs. The second is where we'll spend most
of our time. But let's start at the start.
The first is easy to say and hard to do. Your job is to survive.
I think we can agree that surviving is critical at every point on
your journey (not just the days where things get economically tight).
So how do you do it?
I'm a huge fan of business owners knowing their unit economics. For me, it's everything.
First, Know Your Unit Economics
I know companies that spend a couple months working on budgets, but
that doesn't do it for me. I'm not anti-budgets. I just think they're
secondary to knowing and understanding your own unit economics.
What do I mean by unit economics? I mean understanding the details of
the revenue and costs that go into delivering your offering.
- What does it cost to get a demo?
- What does it cost to convert a demo?
- What does it cost to deliver the service?
- What revenue is earned from that single delivery?
- What margin is created per instance?
If you know this stuff, and understand it deeply, you can create
offers in every situation you are in with whatever discount you need to
offer, just to close the deal and keep going.
I know people say you should never discount your offering because it
impacts your pricing power. I get it. But in the lean years, it's my
experience that you have to come alongside your prospects and just make a
deal that works.
But you can't do that if you don't know where your margin starts and
ends. You don't know how much you can discount if you don't know your
unit economics.
Think about it this way.
It's a silly example but let's say you're selling an expensive suit.
It might only cost you, personally, $1000 to deliver. That's your time
to size up a customer and send in measurements. But it's also the cost
of the final delivery (with some alterations). But it also costs you
$3000 in terms of material to create (your Costs of Goods Sold -COGS).
You can't sell that suit for $2000. If you know your unit economics,
you know you can take a $6,000 suit and bring the price down to $4,500
and still be ok.
(Side note, if you're buying $6,000 suits, congrats. Or consider checking out Proper Cloth where I get custom-made suits much cheaper.)
Then, Chase a Land Grab
I told you that you had two jobs in the lean years. Job number one
was about surviving. But job number two is all about thriving. And my
strategy in a recession is to encourage you to take this opportunity to chase a land grab.
Time for a quick story, ok?
Ray Kroc didn't found McDonalds. Instead a pair of brothers did. You can watch the accurate depiction of their story in Founder.
Ray convinced the brothers to let him help them with a franchise
effort across the US. But for each franchise he sold, Ray only got a
tiny part, the franchisee made good money, and the brothers got a ton of
“free” money.
It's not a stretch to call those initial days his “lean years” for Ray. Until he met a financial consultant who helped him think about a new strategy – an actual land grab.
If you're unfamiliar with the model Ray leveraged, it goes like this.
He bought or leased land and made the franchisees run their franchise
on his land. That meant even if the agreement he had with the brothers
didn't give him much money, he made money from the franchisee in rent
(or portions of burger sales, whichever was higher).
His company, later called the McDonald Corporation, ended up being a
real estate company, not a burger company, because of how much land they
owned and were managing.
Don't Make Any of These Four Mistakes
How does this work if you're a product or service company going thru a
recession? When I say land grab, let's be clear what I'm talking about.
I'm suggesting a shift from revenue to units.
Remember my real estate example where I started? If you bought a
house on the West Coast and held it for a few years, it would grow in
value. You could later sell it for more.
The same is true for product and service companies. If you get a
customer today, even for less profit than normal, even if it's for a
cheaper product, you can later turn that customer into a bigger account
later.
But that's only true if you don't make any of these four common mistakes.
Don't confuse your offers with your value proposition
Let's say you sell software to protect your website. You might want to look at creating several offers (using my product ladder strategy). But your offers shouldn't be different value props. They should simply be different rungs on the same ladder.
If you think about the lifecycle of your customer, you know they
don't need everything at once. You might look at what they need when
they're just getting started, when they have a good amount of content on
their site, and when they start selling from their site.
As they grow, their security needs get more nuanced, and your offers
should be a ladder they can climb – going from one to the next at the
right time.
But that's different than selling different things to that same
customer. Like, “hey, I know you need to protect your site, but you
likely also need to collect leads on your site.”
That's a mistake a lot of people make and it won't be an effective land grab.
Don't stress over discount rates and periods
I know a ton of folks that don't like using discounts or coupons. But most data on coupons suggest that more than 85% of shoppers (of any sort) use coupons. Others fully embrace using coupons for your business.
Here's what I know. When I joined Liquid Web to build and bring their
Managed WordPress and Managed WooCommerce offerings to market, we had
no customers. None. And we were in a highly competitive market.
So I used coupons. Offers like 6 months for 60% off. And 5 months
with 50% off. Those are big discounts. But when the 5 or 6 month period
expired, the revenue jumped. And that made our executive team happy.
It's beautiful to watch revenue jump up without needing new customers.
What I cared most about wasn't the revenue jump. What I cared about
was the unit growth. It's what I focused on and the metric I watched
daily. I was using a discount to get me that land grab.
But that only works if you….
Don't stop investing in your offering
Another classic mistake people make in the lean years is to limit
their own expenses. I get it. But if you stall your product development,
for example, you'll likely watch traction slow down. And in heavily
competitive spaces, the company with the most useful product wins (as
everyone else stalls).
Your job is to keep investing. And one of the best ways to invest is to network.
If you can focus on an integration strategy (and connect your product
with others) during the lean years, every integration is a new
announcement. And every integration also helps other audiences learn
about your product.
Don't attract the wrong customers
If you take this approach, your focus is on units. You're trying to
sign up as many customers (even if they're paying less, or buying
cheaper offerings) as possible so that they can make the upmarket climb
later (in the good times).
Units, units, units. That's your goal.
But not all units, or rather, not all customers are equal.
Some customers want the free version (or next to free) and have no
intention of ever spending more money with you. Those are the customers
you don't want.
This has been true for most of my coaching clients, as well as when I
was launching our Managed WordPress offerings. It's why we sold a
10-site plan instead of a 1-site plan for the first year. I didn't mind
offering a big discount, but I wanted customers who were ready to pay
$99/month rather than someone who wanted to pay $15/month when the
coupon expired.
You're job, in a land grab, is to grab the right customers. Remember
the property graphs I started with? It's like saying you want to buy
homes on the West Coast because they'll appreciate in value faster than
the rest of the country, instead of buying homes in the second chart
(Michigan, Ohio, etc.).
Can I Tell You a Story?
When I was in college I knew an accomplished musician, a music major
who studied piano. She grew up in New Jersey and every week she would
travel to New York to attend the Juilliard School (while in high
school). That's no casual piano playing.
So when I asked how she had become so good (and so fast) and sight reading new music, she told me her story.
It turns out, as a young girl, she got to a point where her hands
hadn't grown enough for her to move to the next set of exercises that
her teacher wanted her to learn.
So instead, the teacher brought a massive pile of music to her and
told her to play each one. Once. Open it up, sight read it, and play it.
Then go to the next. Rinse and repeat.
While she couldn't progress, she developed a new capacity – the
ability to read music that was new to her. Without prep. Without
practice. She did it hundreds (if not thousands) of times.
And, as you can imagine, when her hands grew a bit, she could
continue her training but she had leaped forward (compared to her
peers).
It is what got her into Juilliard. It is what got her into the Berkeley music program. And what made her stand out from others.
Make The Lean Years Your Time
You can look at these coming days and get mad at the situation you're
in. You can simply consider it bad luck. Or you can determine to
navigate this period like a piano player whose hands aren't big enough
to move forward – by making use of this time to develop other
capacities.
This is your time.
First you survive. Then you thrive.
You do it by knowing what kinds of deals you can make. Then you make
them. Focus on units (or customer count) instead of revenue (or profit
margin).
Get close to your customers. Craft new offers. Build a product
ladder. And you sign up as many folks as you can so that they become so
attached to you that they never think of leaving.
Then, when the recession wraps up, and things get better, you'll see you've stepped to a completely different level.
A Special Offer
I don't have to look that far back to when I was applying these same
strategies when COVID hit. My coaching business looked like it was going
to disappear. Every business I knew was lost and trying to figure out
what was next.
Thankfully I knew and took my own advice. I reached out, lowered some
prices, signed up some new clients. Within a few months, my overall
revenue was up, not down.
If you find yourself in this same spot now, and want help, we can find a way to work together via one of my coaching programs. I'll even discount my rates for three months. See what I did there?
