The Recession-Proof Business: Chapter 2
Rule #2: Solve a Problem That Gets Worse in a Recession
In the preface to this book, I mentioned an internal research project that I undertook to look for small businesses that became billion-dollar giants in a recession, depression, or economic panic. This research spanned the last 120 years of US economic history and dozens of interesting case studies.
What’s intriguing about the results of this research is the remarkable consistency among these case study companies. All these companies, without exception, had three traits in common – and it’s these traits that form the basis of the next three rules to recession-proofing your business formula.
Let’s start with the next rule, Rule #2: Solve a Problem That Gets Worse in a Recession.
Guaranteed Customer Demand
Customer demand is not generated. It is merely channeled. You cannot tell customers to want something they fundamentally do not want. You can try to convince customers to satisfy their demands by buying from you rather than from a competitor. But, ultimately, trying to convince customers that they have a desire when none exists is pointless.
Since customer priorities change in a recession, it’s not all that surprising to discover that customer spending patterns change to reflect these new priorities.
While this seems like self-evident common sense, a shockingly high percentage of businesses that were built on the customer spending patterns of a boom economy don’t actually change what they offer in a recession.
If what customers spend money on changes in a recession, shouldn’t what you offer change right along with it? Similarly, if customers radically change what they spend money on in a recession, shouldn’t you at least consider an equally radical change?
One way to guarantee that customer demand will exist for what you have to offer is to provide your customers with a solution to a problem of theirs that gets worse in a recession. When you do this, you guarantee that customer demand exists. Sure, you still have to compete against your competitors to get a piece of that spending, but at least the spending does exist.
This is vital.
It is one thing to compete against a competitor for customer spending that does actually exist. It’s another thing entirely to compete for spending that is just not there anymore. The latter will kill your business instantly.
When you look at what you provide to customers, you have to take a hard, critical, emotionally unbiased look at the situation. Do your products and services solve problems that are still relevant to customers during a recession?
If not, you have to change or at a minimum make some adjustments to your product, services, or the marketing used to communicate their relevancy to customers in a recession.
Recession Success Story #1: Fortune Magazine
Henry Luce launched the first issue of his new magazine concept 90 days after the stock market crash that launched the Great Depression. At the time, his new publication, Fortune magazine was expected to fail. It was hard to imagine how a publication that focused exclusively on business issues in great depth could succeed.
The only competitor was The Wall Street Journal, which at the time consisted mainly of short articles and a great deal of statistical information about the financial markets. No publication explored the major business issues of the day in any great depth.
However, when the stock market crashed and the 10-year-long Great Depression followed, suddenly the entire country had lost its fortune and was eager for information on how to get it back. Fortune piggybacked off this inherent demand to solve a problem that got worse for investors in a recession – finding a way to recover a lost fortune.
Through a combination of insight and a bit of good timing, Fortune magazine solved an incredibly relevant problem for its customers during the Great Depression. By the end of the Great Depression, Fortune had become mandatory reading for anyone in the United States having anything to do with investment or business. The publication came out of nowhere to dominate the business market – during a depression.
Fortune found the boom marketing within the Great Depression. Even more remarkable is the pricing that Luce was able to charge for the magazine. When the Sunday edition of The New York Times cost 5 cents, Luce charged, and got, $1.00 per issue of Fortune. That’s right, in the midst of the Great Depression he had the guts to charge 20 times more than the highly respected Sunday edition of The New York Times.
While Luce certainly had the guts, he also had the “wind at his back” by solving a problem that gets worse for customers during a recession. When you do this you not only increase your ability to grow unit sales but also do it at a premium price – providing superior profit margins in a recession.
Recession Success Story #2: Federal Express
At the height of the oil crisis in 1973, with jet fuel prices at sky-high levels, Federal Express launched its trademark overnight delivery service. How in the world does a company charge 20 times more than its nearest competitor; have its primary costs, jet fuel, triple in price; and still become a Fortune 500 company?
This is the infrequently told story of Fred Smith and Federal Express. Fred Smith was a college student at Yale University and a private pilot. He loved to fly planes and spent a lot of time at the local commuter airport in New Haven, Connecticut.
In the late 1960s, he noticed that a number of the small four-seater passenger aircraft flying in and out of his home airport flew without passengers. He thought this was odd. Curious, he began hanging out in the pilots’ bar to find an answer to this unusual phenomenon.
It turned out that most of these pilots were flying charter flights for IBM and Xerox, both of which had major centers of operation in the area. But instead of flying IBM and Xerox executives, these planes had been chartered to fly spare parts for mainframe computers sold by IBM and Xerox to their Fortune 500 clients.
Fred Smith thought it was terribly inefficient to charter an entire plane just to fly a 2-ounce computer chip across the country. But IBM and Xerox’s Fortune 500 clients demanded it.
You see, as the oil crisis started, the big companies laid off a number of employees. This is so common these days it’s hardly news. During the recession, these big companies had a big and growing problem. The work that needed to be done was growing, even though their staff levels were shrinking. IBM and Xerox solved their clients’ problems by providing computer technology to automate much of the work previously done by people.
The only problem was the computer systems provided by IBM and Xerox would break down and need to be repaired. IBM and Xerox service contracts guaranteed that in the event their computer systems failed, they would fix the equipment absolutely, positively by the next business day. Does this sound familiar?
Fred Smith noticed this trend and saw the problem get worse as the US economy headed into a recession. He launched Federal Express as an overnight computer spare parts delivery service primarily for companies like IBM and Xerox. While his prices per pound were 20 times higher than those of the US Postal Service, he astutely pointed out to IBM and Xerox that his shipping prices were 99 percent less expensive than chartering an entire plane!
Fred Smith turned Federal Express into a Fortune 500 company by serving a need that got worse in a recession – the need for rapid delivery of spare computer parts necessary to run the computers of Fortune 500 companies that used technology to do the work of employees they had laid off.
And why did Fred Smith decide that FedEx’s slogan would be “When it absolutely, positively has to be there the next day”? Because IBM and Xerox refused to do business with FedEx unless those demands could be met.
While many credit Fred Smith with being an inventive business genius, we should really be crediting Fred Smith for being observant and being a good listener. When you bother to look for the problems that get worse in a recession, you will spot them. When you understand the underlying dynamics behind these problems, opportunities suddenly become visible.
It’s a Matter of Perspective
Fred Smith had amazing insight into his customers’ problems. But if you think about it, the key pieces of information that led to the formation of Federal Express were “hiding” in plain sight for anyone to see.
- Observation #1: In a recession, big companies lay off employees.
- Observation #2: Big companies use computers to automate work that laid-off employees used to do.
- Observation #3: Computers break down and need to be repaired.
- Observation #4: Customers of big companies get angry when those companies’ computers are down, resulting in poor customer service, late shipments, and defective products.
These four observations are hardly big secrets. All of them are common sense. But only Fred Smith was able to see the big picture and piece together what was under the noses of everyone in the country.
And because he had the right mind-set (going back to Rule #1 again), he looked for problems to solve, took the time to understand his customers’ problems (and you could argue their customers’ problems too), and found a way to solve them.
The result was that Federal Express was able to ride a huge wave of increasing customer demand in the midst of a major recession, an oil crisis, and runaway inflation.
When you take the time to find and solve a problem that gets worse in a recession, it gives you customer demand – one of the key assets you need to create a recession-proof business.