What do Airbnb, MailChimp, Microsoft, and Uber have in common?
They were all started in an economic downturn.
Recessions can be brutal, but they may also be the spark that catalyzes innovation inside your business.
Before we outline how to play offense in uncertain times, let’s begin with a summary of where we’re at.
A Recession in 2023?
Most economists believe the world will experience a global recession in 2023. While the “R word” can be scary, most downturns follow a predictable path, and if you understand them, you can spot opportunities.
Recessions are usually triggered by an unusual event that causes a widespread slowdown in consumer and/or business spending. Companies react by laying off workers, and unemployment rises.
Governments then step in to artificially restart the economy by lowering interest rates and/or government spending, and a new era of expansion begins.
The Wrong Approach
Some owners assume that in addition to preserving cash, the best way to outwit a recession is to lower prices to ensure they are the cheapest provider in their category. Lowering your prices can be tempting. As the recession digs in, consumers reach a tipping point and look for cheaper alternatives.
The longer a downturn lasts, the stingier customers get. In the early days, consumers may tighten their belts while anticipating a reduction of cash flow, but unemployment usually lags the economy overall. Companies must experience lower demand, realize they have excess staff, and then go through the arduous process of deciding who to cut and how. It all takes time, which is why the unemployment rate is a lagging indicator of a recession.
However, lowering your prices triggers a downward spiral of thinning gross margins, leaving you little room to invest in differentiating your business from its competitors. As competition heats up, margins get thinner. A business with little differentiation and tight margins is of little value to an acquirer. You may win the battle for short-term sales, but you will lose the war.
Step-Change Thinking
How To Avoid the Race to the Bottom
What if you don’t want to compete in a price war to the bottom or cower in the corner until things improve? What if you want to capitalize on challenging economic times?
This requires an entirely new way of approaching your industry that we’ll call “Step-Change Thinking.”
To understand Step-Change Thinking, let’s first look at the opposite: incrementalism.
In a world of continuous improvement, most products and services are positioned as incrementally better than their competitors. Direct rivals duke it out by making small changes to their offerings, giving one a slight lead for a few months before the other can match it. Baby steps.
By contrast, a step-change improvement is something entirely different.
A step-change is when you take a large step forward all at once. Rather than small tweaks, you make a significant improvement over your existing competitors.
For Example
To illustrate the concept of a step-change improvement, let’s go back to the early 2000s.
In those days, if you were a well-paid executive catching a flight in the morning, you likely would have scheduled a car service to pick you up at an appointed time. Two or three times the price of a taxi, these services were expensive and cumbersome to schedule but worth it because drivers almost always showed up on time in a clean car and with a smile.
Most big cities had a handful of these town car services, and they competed by making small, incremental changes to their business model. One might provide a fresh copy of the local newspaper to differentiate themselves.
A competitor would get wind of what their rival was offering, and they would provide a newspaper and a bottle of water for their passengers. This competitive environment incrementally pushed the industry forward in small, virtually imperceptible steps.
Then along came Uber in 2009 with a step-change improvement. Uber enabled busy executives to hail a town car instantly using their mobile application. (This was years before introducing UberX and its broader selection of vehicles and food delivery services.)
The in-car experience was similar to a town car service, but Uber’s offering was a step-change improvement on a number of dimensions:
Since your credit card was pre-loaded into the app, there was no need to fumble with money or provide payment at the end of a journey.
Your phone’s mapping feature allowed you to see your car as it approached your location, reducing your anxiety about a late arrival.
There was no need to book the car in advance, so you could save the hassle of the call and be flexible on your departure time.
It all combined into a step-change improvement in the experience of getting to the airport. And the cost? A little less than scheduling a town car.
It was a step-change better value proposition than anything in the market. Today, Uber’s market capitalization is measured in the tens of billions of dollars despite starting their business in the depths of the Great Recession.
Demanding More For Their Money
A recession means businesses and consumers demand more for their money. You can meet that demand by lowering your prices—and that will keep your customers buying for a while—but lowering your prices will slash your margins and undermine the value of your business in the long run.
To play offense, you need to make the case that your product or service is comparably priced to the alternative but a step-change better in terms of value.
While Uber provides an example of a technological upgrade, making your product or service appear like a step-change improvement to a business customer often requires you to show how you will save your business customers money on the people they employ.
The Yes Box
To visualize what a step-change improvement looks like, plot your offering in a two-by-two matrix. As you’ll see in the illustration above, the Y axis measures the total cost of a solution from high to low. This includes the hard and soft costs (i.e., the cost of employing the people that use it) of a solution.
The X axis measures the overall quality of the solution from bad to good. To move a customer to say yes to buying your product or service in a recession, aim to position it in the Yes Box at the top right corner.
Wrapping Up
A recession can be challenging to navigate, but a difficult economy can also present opportunities. Some of the most successful companies we know and love—from Airbnb to Uber and Mailchimp were all started during a recession.
While it can be tempting just to lower your prices to maintain sales, becoming the low-cost provider in your industry is a race to the bottom nobody wins. Instead of playing defense, the most valuable companies go on the offensive during a recession through step-change thinking.
They target their customer’s Yes Box by providing a better overall product at a lower total cost at a time when their prospects are looking around for alternatives.
Learn More About Step-Changing
Download our eBook to learn more about how to leverage the step-change approach (with more examples), and nail down your Yes Box.
