Playing offense during a downturn
Most companies have executed on defensive plans to get through the COVID-19 pandemic. Playing defense is about two primary things:
- Reduce burn and extend runway. This includes taking a microscope (and then a hatchet) to every cost line item on the income statement: lowering headcount costs through some combination of salary cuts, RIFs and furloughs; renegotiating.supplier and real estate contracts; reducing unnecessary outlays, and other similar measures. Headcount is the biggest opex line item for most companies, so that’s where most companies naturally tend to focus focus, though it’s worth emphasizing that you should never, ever lay off your A-players.
- Increase cash balance: Raising capital through a combination of equity and debt, though (of course) only a subset of companies will have this option available to them.
Here are a few real-life examples of defensive strategies. Note the first company’s focus on talent retention.
“We managed to reduce our monthly cash expenditures by half while reducing our talent pool by only 20%. Most talent reduction was in support, where we can rehire relatively quickly. Finding talent — attracting, recruiting and hiring great people — is one of the hardest things to do quickly. The fact that we have been able to retain the large majority of employees and our top talent, positions us to accelerate growth faster coming out of the recession.”
“We right-sized the business and let a dozen people go, mostly on the SDR team. This extends our runway to 24 months, even without additional revenue.”
“We closed $XXXk of extension financing, which will be followed by an additional $YYYk of committed capital in the next week or two. This was at the same terms of our seed financing in December 2019. With the added capital, we have cash into Q4 2021. We will keep the extension financing open for the next few weeks, leaving the potential to raise up to $2M. If you know anyone who might be interested, please reach out.”
Defensive strategies might help a company survive, but thriving is an entirely different matter. In order to exit the recession in a stronger competitive position and to lead their market, companies must play offense. Offensive strategies can be grouped into the following buckets:
- Increase operational efficiency: Lower variable costs, inclusive of customer support; improve sales and marketing efficiency; and create more nimble and flexible business processes.
- Improve customer retention: Figure out scalable ways to get your existing customers to stay with you longer.
- Test marketing strategies: Experiment with new marketing channels and strategies to acquire customers.
- Develop a vision for the future: Figure out how customer needs will evolve post recession, and use this insight to target new segments and grow your addressable market through new products/features, geographical expansion, or channel partnerships.
- Uplevel your team: Take advantage of top talent availability to shore up weak areas of your team.
Let’s look at each of these in more detail, annotated with some anonymized real-life examples.
Increase operational efficiency
A recession is a great time to closely examine every aspect of a company’s business model, ranging from how it acquires customers to how it services them. Lowering operating costs drives improvement in gross margin and/or operating margin, resulting in an enduring source of competitive advantage.
Because increasing efficiency lowers costs, it’s sometimes lumped in with other defensive moves. However, I’ve classified it as an offensive move because it improves a company’s competitive moat, ultimately enabling it to move aggressively to take market share from competitors.
a. Lower COGS: Lowering variable costs is an effective offensive vector because it improves your Gross Margin %, enabling you to extract more Gross Profit from the same revenue dollars. Create a pie chart of the variable cost of delivering your service. This includes cost of raw materials (for hardware products), cost of cloud services and data centers (for software products), transaction costs (eg: payment processing), customer support costs, as well as refunds / credits. Benchmark each of these costs against best of breed companies in your space (read their public filings!), figure out the biggest 2–3 opportunities to lower your variable costs, and set company-wide cross-functional goals to lower each of these big ticket items. Some real-life examples:
“Lower cost of support from 2.2% of revenue to 1.2% of revenue by moving most Tier 2+ customers to self-serve support.”
“Reduce payment processing costs to < 2% through implementing radically cheaper payment options (eg: bank transfer) and renegotiating payment processor contract.”
b. Improve acquisition and activation efficiency: It’s critical to understand your all-in cost of acquiring and activating customers. Marketing efficiency is measured by CPA and Payback period. A good way to measure sales efficiency is the efficiency score (Net New ARR / Net Burn) popularized by Bessemer Venture Partners as part of their GRIT framework to evaluate SaaS companies. Bessemer puts it well: “In a bull market, startups can get away with less efficient growth by acquiring new customers at a higher cost than necessary. However, this approach reflects a lack of discipline and doesn’t make for resilient companies. The good news is that when you do develop more efficient businesses, they are rewarded in all markets.” Some real-life example of sales efficiency goals:
“Reduce customer onboarding and setup cost by 50% by automating the onboarding process and delegating information input to the customer.”
“We will focus more on efficient growth vs growth at all costs. We right sized the business and let some people go to ensure we are not burning too much money for inefficient growth in this environment.”
I like the first goal because it focuses on the oft-neglected step of customer onboarding and activation — getting customers to actually use the service after signing up for it. This onboarding step introduces significant costs into the overall equation, but is hidden/neglected because it’s typically not clearly owned by a function (many sales/marketing teams think of their job as driving customer signups vs activating them), and is therefore a perfect candidate for optimization.
c. Establish more agile processes: Every company would benefit from going back to its startup roots and becoming scrappier. This applies to business processes that have grown calcified with time. For example, the budget allocation process at most companies is too slow (monthly or quarterly), limiting their ability to move dollars quickly when opportunities present themselves. Companies would be well served to examine key processes — resource allocation, procurement, decision making, hiring — and see how they can be optimized.
A best practice here is to establish Amazon-style Weekly Business Reviews with 100% attendance from the leadership team. To quote from the article: “Weekly Business Review (WBR) … is a weekly walk though of key metrics with every leader on the team. Metrics owners are expected to come prepared with concrete reasons why they missed their metrics and what they are doing about it. While this is as fun as a root canal, it results in a team that knows their numbers will. … Nothing crystallizes your priorities better than having to stand in front of your peers and leadership and provide concrete answers to every question. ” WBRs — especially if the management team uses 5 Whys to dig into issues— are a great tool to shine the light on root cause behind issues, which typically are poorly designed business processes. For example, the marketing team might not be able to move the new customer metric rapidly enough because money was unable to be freed up from other opex sources to be moved to marketing. The root cause is lack of agility in budget allocation.
Improve customer retention
It’s more important to retain current customers than to acquire new ones. Improving customer retention is an offensive play because: (a) it prevents competition from acquiring those customers and (b) it improves customer lifetime value (LTV), enabling the company to increase your cost per acquisition (CPA) correspondingly.
To start with, segment customers based on slowdown impact (positive, neutral, negative) and create engagement strategies for each segment. For customers who are experiencing a neutral or positive impact, ensure your product scales to support their growth — this will also create possible upsell/expansion. For customers who will likely experience a negative impact, proactively offer flexibility on pricing and contract terms, to help engage these customers and keep the partnership strong. As mentioned below, helping customers when they are hurting is a great way to build loyalty.
Here are a few additional ways to improve retention:
a. Help customers who are facing temporary troubles: (already mentioned above but worth calling out separately) You probably have customers who are experiencing near-term challenges due to business turbulence, but are otherwise healthy once the environment gets better. If you proactively help them in their time of need, they will be loyal to you for life.
b. Focus on retention drivers: Do you have a good understanding of what drives customer retention for your products? It’s not always about cost/price. It might be personalization, it could be better customer support, or maybe parity with competition on specific product features. Use quantitative and qualitative data to understand customer retention drivers and create a retention-focused product roadmap.
c. Launch loyalty programs: Can you create a usage-based loyalty program that incentivizes customers to use you more, in exchange for tangible and intangible benefits? Consumer brands have used loyalty successfully for decades to drive retention; I continue to believe this can apply to B2B companies too.
Some real life examples:
“Around 30% of our customers (mainly in restaurants and hospitality) needed to pause temporarily in April due to covid-19. We provided these customers with a 1–2 month payment pause to help support them through the current period. In the last week of April, customers’ pausing has reduced, and we have had a couple of customers who voluntarily reactivated us.”
“Retention is going to be our key focus for the coming quarter. Therefore, we’ve pivoted the Customer service team’s goals to focus on retention. We’ve also started a loyalty wallet program to increase retention.”
“We need to invest (dedicate resources) in reliability to improve the functionality beyond MVP. We have repeated evidence that service reliability is what our customers value the most, but we’ve never been able to prioritize it so far. It can become our core functionality and provide a durable competitive advantage against competitors.”
Test new marketing strategies
One of the side effects of a recession is that media becomes much cheaper, primarily due to lack of competition. This doesn’t just extend to Google and Facebook, but also to traditional media platforms like print, TV, radio, etc. This opens up a golden opportunity to experiment with new marketing channels that most companies were priced out of earlier. Even if a company doesn’t have resources to buy ads on TV, the constraints imposed by a slowdown can drive thinking around creative and inexpensive new ways to reach potential customers at scale. Some real life examples:
“We’re running a commercial on national TV next week; the 30 second slot normally goes for $45k, and we got it for $8.5k”
“We’re going to mechanize our great customer feedback with nurturing campaigns to drive more top of the funnel.”
“We launched our first webinar! We’ve already seen 1,000+ webinar registrations and have quadrupled our inbound leads.”
“We’re going to lean on partnerships with community leaders to endorse new features (keeps costs low for us). We’re also going to reach out to YouTube influencers as Youtube daily viewed hours rise and additional revenue streams are more important than ever to influencers. (Again does not cost us dollars to do the outreach)”
“We launched a 60-day free trial. This is to help us focus on providing a more prescriptive, no-risk way for prospects to try us. Early signs suggest this is working and we’ll be doing more on this GTM motion.”
Develop a vision of what the future looks like
Downturn or not, it’s important for the CEO to recognize if the company’s current products and market opportunity are sufficient to fulfill the company’s ambition. Expanding the company’s product portfolio, geographical footprint and channel partnerships to serve new customer segments is a classic offensive strategy.
During recessions, forward-looking companies use a combination of deep customer insights, good judgment and plain common sense to develop a crisp vision of the future. They figure out how customer needs will evolve, which customer segments and markets will be attractive, and invest in products that help them skate to where the puck is going. M&A can be a great way to get there faster than organic product development — in particular, during a downturn, when many attractive assets might be available for a reasonable price.
Everything starts with a clear vision of future customer needs and behaviors. Some real-life examples:
“We believe that the largest segment of our customers are going to be extremely price-conscious & sensitive, and our products should provide high utility at extremely low prices. Consequently, we need to make sure we are offering the lowest prices on the market for all key products/ styles/ brands.”
“We will develop new integrations beyond our current partners to increase customer value, TAM, and strategic partnership for co-marketing and co-selling opportunities. We’ve talked about this in the past but we’re doing the work now and have been building this for the past quarter.”
“As the US market becomes increasingly saturated, Canada, Australia and UK present the biggest opportunities for us — and we have set a company goal to launch in these markets by EOY.”
Uplevel your team
There will be a lot of top tier talent available at every level of the organization. During boom times, you might have cut corners while hiring. This is an opportunity to take a step back, critically analyze your team (starting with your execs) and figure out where the gaps are. If you do this right, you will be able to build a stronger team and hire leaders who you might never have earlier imagined you could hire. Some real-life examples:
“We hired a new Chief Product Officer, XYZ , who was previously the Chief Product Officer at ABC (acquired by NNN).” (this company also played defense by letting 12 people go)
“We are making an offer to a strong head of engineering who has grown teams to 300 people in his past roles.”
Companies need both defense and offense. During a recession, a company’s mindset disproportionately shifts towards defensive strategies. However, without a clear offensive plan — inclusive of operational efficiency, customer retention, marketing strategies, customer segments and team — companies will not be well positioned to grow and win their category when the recession ends.
Postscript
A CEO friend read this article and sent me a note outlining his strategy. His note (enclosed below) is a crisp summary of how a company can combine both defense and offense, and nicely maps to the areas above. I have annotated in BOLD how each line item maps to the Offense / Defense buckets.
The article totally resonated. We took the approach of decisive immediate defense, but then a quick handoff to Offense.
- Let go of about 50% staff where either they were related to projected surplus growth or working on areas that couldn’t be a priority anymore ← DEFENSE
- We then jumped to Customer Retention (both better touch points, as well as offering creative solutions to their newer problems) ← CUSTOMER RETENTION
- Primary focus right now is to fix business issues: Lowering cost to serve, understanding growth efficiency, taking out unnecessary processes ← OPERATIONAL EFFICIENCY
- Secondary focus is to re-evaluate product/market fit, because the market has changed. Budgets are lower, problems are somewhat different. How do our products map to that. ← DEVELOP A VISION OF THE FUTURE
