In 2009, I decided it was a good idea to help co-found a software development consultancy. I could have had better timing. This was the year the Great Recession was in full swing from the market meltdown of 2008 and one of the most severe economic downturns since the Great Depression. Officially, the economy started retracting in 2007 with a deep recession lasting through 2009, and it actually took many years for the economy to recover to the level of employment and output prior to 2007. I am happy to say that my startup consultancy made it through and I spent 10 years as an owner, but as I look back on my experiences during that time, one thing is certain. Having a solid strategy for driving profitable growth should include the same basic principles no matter the economic situation we face as leaders. What do I mean?
The basics always matter
I am an American football fan. I enjoy watching the strategy, the high level of execution of that strategy, and how coaches lead their teams. Teams can create pretty complicated plays and I don’t pretend to understand all of the formations of the game, but one thing is very certain. The foundation of the game is blocking and tackling. These are the basic skills that good teams are very good at and a source of problems for teams that struggle. Leaders face the same challenge in their businesses. There are all kinds of complicated strategies that can be imagined that can boost competitive advantage, but the foundational blocking and tackling are critical in driving long-term profitable growth.
There is conventional wisdom among business leaders that when times are tough, it's best to get back to basics. While I agree with that notion overall, my follow-up thought would be, “why did you get away from the basics in the first place?”. Executing well with the basics is a benefit in good economic times and tough ones. So, what are the basics of driving profitable growth during an economic downturn then? The short answer is, mostly the same as an economic upturn. Let me explain.
Profitable growth not growth over profitability
To begin, let’s define profitable growth as growth strategies that do not sacrifice profitability. There are plenty of growth strategies that can eat away at margins and sometimes leaders will get into a mindset that it’s okay to sacrifice margins for a short period of time to reach their next growth level. While that can work, it's hard to know when you’ve gone too far until you have actually gone too far. Leaders become much more aware of this during times of economic downturn. Warren Buffet famously said, “No one knows who is swimming naked until the tide recedes.”, which really means leaders have taken a growth over profitability mindset instead of holding fast to a profitable growth mindset. Let’s use a practical example of this by thinking through growing sales or revenue in an uncertain economy.
There are two types of customers every company has regardless of what value they provide in the market. They have new customers and existing customers. Not a very profound revelation I know, but if we understand the value of what each customer segment represents, the strategies we develop can be better aligned to driving profitable growth. Here’s what I mean. I’m going to go out on a limb (maybe not that far) and say the #1 focus for business leaders when it comes to growth is acquiring new customers. That’s for good reason. New customers represent completely new opportunities for revenue growth, increased brand awareness, and can spark growth across an entire organization. In large part, a business needs new customers to sustain and grow. During good economic periods, leaders try to optimize their strategies for acquiring new customers and market share, but this becomes more of a challenge when an economy begins a downturn. New customers become harder and more costly to acquire and ultimately, the growth of the company slows as a result. So, when we talk about driving profitable growth, the lack of new customers can quickly impact profitability. How do you mitigate this impact? Your existing customers are the answer.
When existing customers become gold
We can never lose sight of the fact that a free market economy has cycles. As much as we know there will be economic upturns, there will also be downturns. A solid profitable growth strategy includes elements that work to increase opportunities during upturns and maintain opportunities for growth during downturns. What does that look like? In addition to new customer acquisition, the answer is to have a solid strategy for driving profitable growth with your existing customers. A company's marketing costs of acquiring new customers during an economic downturn increase. Your conversion rates for turning new prospects into customers go down. Marketing costs are higher as a result of the lower conversion rates, and the risk to profitability goes up. Does this mean you don’t sell to new customers in times of economic downturn or uncertainty? Of course not. New customers continue to be the lifeblood of your business, but a solid strategy to drive profitable growth with your existing customers becomes gold in uncertain economic conditions.
You should make sure you have built into your organization’s strategy and culture the importance of deepening relationships with existing customers. Regardless of economic conditions, deepening relationships with existing customers can have a huge impact on profitable growth. Here are just a few ways:
Increased Revenue: Selling to existing customers is usually more cost-effective than acquiring new customers. Existing customers are already familiar with your brand and products, and they are more likely to make repeat purchases.
Lower Marketing Costs: Marketing to existing customers is typically less expensive than acquiring new customers. You have built relationships with them already so the cost to reach them is lower.
Higher Conversion Rates: Existing customers are already familiar with your brand and have built trust in your products or services. As a result, they are more likely to make a purchase when presented with an offer. This can lead to higher conversion rates and increased revenue.
Stronger Customer Relationships: Putting a priority on your existing customers allows you to cultivate stronger relationships. Building connections between your understanding of their needs with how you have provided them with solutions strengthens your partnerships and leads to increased loyalty.
Lower Risk: Selling to existing customers can be less risky than acquiring new customers. You already have a good understanding of their needs and preferences, which can help to reduce the risk of missing the mark when it comes to delivering real value.
It has to be intentional
Driving profitable growth during an uncertain economy can be a challenge. You will better meet this challenge if your corporate strategy includes the resources and culture of investing in your existing customers. Make this strategy part of your basic blocking and tackling as a company no matter the state of the economy. This has to be intentional. Be honest with yourself. How is your overall team equipped to drive deeper relationships with your customers? Do you have people in your organization that are responsible for driving this strategy? How well do you actually know your customers and their needs? Are they inviting you to the strategy table as a partner or are you one of many vendors or suppliers?
Putting a strategic focus on your existing customers will certainly help you during a good economy, but could be the vital difference for profitable growth during economic uncertainty.
Originally posted on LinkedIn: https://www.linkedin.com/pulse/driving-profitable-growth-during-economic-uncertainty
