Hi, it’s Victor Cheng, author of the book The Recession-Proof Business and founder of SaasCEO.com. And today, I want to talk to you about taking advantage of changes in market demand during a recessionary environment. In looking at the past 12 recessions in US history, one of the key lessons I learned is that the size of the economy shrinks, usually by a small percentage, but the spending patterns within the economy changes much more dramatically. So, for example, in the last recession back in 2008-2009, the economy shrank about 5%. But, entire industries got obliterated, people were seeing 20%, 30%, 40% drops in sales, and so on and so forth. And so, there’s like a big disconnect. Why is it that economic spending changes by only, say, 5% but my sales dropped by 20%, 30%, or 40%? And so, to explain that, it’s very simple. What happens is, within an economy, the spending patterns shift, they move. It’s not that they shrink, which they do a little, but they move a lot more than they shrink. So, I’ll give you some examples from both the last recession and the current one that we’re in or likely to be in shortly.
Back in 2008-2009 when the economic crisis hit globally, one of the things people spent less money on was fine dining. They didn’t want to go out to very nice restaurants because they weren’t sure how much money they were going to make and whether they could still afford it or not. So, what happened was people who used to go to high-tier, elite restaurants would go to mid-tier restaurants. And people who used to go out to eat at mid-tier restaurants would go to low-end restaurants. And people who used to go out to low-end restaurants would now go to fast food restaurants. And people who used to eat out at fast food restaurants pretty regularly would now eat at home. So, in that situation, everyone’s still eating. The same amount of foods is still consumed, but where and how and by whom it was consumed varied and shifted quite dramatically.
Here in this particular economic environment — I’m recording this video in March 2020 — we have the COVID-19, coronavirus, situation going on here in the United States. I’m hoping it goes well. There’s a lot of uncertainty and stress around that. But, one of the implications of this particular economic environment is the fear of getting ill. And there’s some legitimate fear and concern around that. So, fewer people are going out to eat. What’s happening is, again, fine dining is kind of getting obliterated. I’ve seen restaurants here in Seattle area that have had a 90% drop in sales. No business can sustain that for very long. And we’re seeing people eat out less. Those who eat out or used to eat out are now doing more takeout, and those who used to do takeout are now just sort of cooking at home.
Now, everyone’s still eating. The demand for food has not changed, but the spending patterns have. So, you’re seeing a lot more people buying nonperishable items — pasta, rice, things that store in a pantry really well. So, that has really accelerated in terms of market spending. You’re seeing a huge demand for delivery services: grocery stores that deliver, restaurants that deliver, delivery services that deliver from multiple restaurants. Those are doing well because people still have to eat. They don’t want to cook. It’s the same problem they’ve always had: “I’m hungry, but I don’t want to do the work.” But now, they have a concern, a particular issue they’re trying to avoid, which is social contact with other people. So, the key lesson here is spending will often shrink a little but shift a lot. The key to taking advantage of that is you have to find the market demand. Now, this is the mistake that most SaaS CEOs make. They look at what’s not working, and they don’t like it. Sales of your flagship product are down 10%, 20%, 30%. Or new bookings are down 30%, 40%, 50% — whatever the number might be.
And invariably, when you see a number drop pretty dramatically, the instinct is to stare and pay attention to the drop, [gasp], and notice that. And that’s the exact wrong thing to do in a recessionary environment. What you want to do is to pay attention to what did not drop. Better yet, pay attention to the parts of the business that actually grew. And usually, what happens is, if you have multiple streams of revenue, different products, different regions, it’s quite common that the largest part of your business is hurting in a recession. And what also happens is, sometimes there are small pockets, a particular product or service that represents maybe 10%, 15%, 20% of your sales, that actually was okay. Money still got spent or maybe sales even grew.
So, for example, in the heavy equipment industry in the last recession, people stopped buying new equipment and new machinery. What they did do was spend more money on servicing the equipment they already had. So, you see a lot more growth in the service contracts for active maintenance or extending the life of an existing asset. That became more popular. And the residential construction industry, new-home building, slowed down quite a lot in the last recession, especially because it was a housing-industry-based recession along with all the financing around that. What you saw was more people spending money at Home Depot to fix up the existing house. You saw more remodeling, less new-home building. People who used to remodel shifted to doing it themselves. So, pipes still get broken in a house. Homes still need paint in order to protect yourself from the elements and from the rain. But, how they solved that problem shifted. So, the key here is to look for what’s still working in your business.
And if nothing is working in your business, then you have to find the market trend that is now occurring that wasn’t true before the recession. I’ll give you a simple example. There are several fine dining restaurants here in the Seattle area. And they’ve experienced a 90% decline in sales. And the most premier restaurant in Seattle, in my opinion, is a place called Canlis, and it’s owned by Mark Canlis, I hope I pronounced his last name correctly. And it’s like $500 to $1,000 per dinner for one person, something in that range with wine and alcohol. So, it’s extremely fine dining. I’ve not been there. It’s out of my price range. I’ve always had it on my list of places to go. And they recently announced, in this recession, they are shutting down all operations for fine dining. And instead, what they’re doing is they’re offering up a to-go coffee service for breakfast. They are selling drive-thru lunchboxes for lunch, and they are creating a dinner delivery service.
So, the entrepreneur Mark Canlis — who has been in business 20 or 30 years, as I understand — within days of this recession hitting, realizing 90% drops in sales are not sustainable, and motivated by a desire to keep the business running — mostly to keep employees employed and earning something — he cancels his entire business. The premier restaurant in Seattle, shut it all down, because you know what? It’s not what people want. There is no demand for that. What do people want? They still want to eat. They just don’t want to sit in a room with other people and risk exposure to the coronavirus, which is amazing. He shut the entire business down and in the parking lot — his prized asset now is not the restaurant, it’s the parking lot in front of the restaurant — he can do drive-thru. So, you drive through in the morning, you can get special coffee and certain breakfasts to go, and you don’t have to get out of your car. Same thing with lunch, and then he’s going to deliver dinner to your door. He’ll drop it at the door and walk away. You never have to see them. No shaking of hands, no passing of money from one to the other, no handing of goods. Social distancing at its finest.
So, that’s a remarkable shift for a CEO, to recognize the market’s changed quite dramatically and then to adapt equally quickly. So, the key thing to realize here is, in a recession, market demand shifts much more than it contracts in the entire macroeconomy. And if you are not in the part that it’s shifting toward, and you’re in the part that it’s shifting away from, you’ve got to go find where the demand is. So, if you have none in your existing business across all product lines, across all service lines, across all regions, then you’ve got to get out in the marketplace and figure out what do people want now. And, it’s usually quite different than what they wanted before the recession. Go find it and adapt. So, if the market has changed 20% or 30%, you cannot remain in business unless you change at a greater pace than the degree of change in your market. Market changes 30%, you’ve got to change 40% to 50%. If the market changes 90%, you got to change 100% in order to make it. So, that’s a rough rule of thumb. Again, these are lessons I’ve learned from the last 136 years of economic data, the last 12 or 13 recessions, and something I’m seeing unfold yet again in this particular economic environment, which looks recessionary in nature. We’ll see if that actually pans out or not, but it’s certainly important for you to be prepared in case it is.
So, until next time, I wish you the best of luck in your business. Stay tuned for other videos on how to thrive in this economic environment. Thanks and have a great day.
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