Running an e-commerce business in an economic downturn can present intense challenges – some will thrive & grow – others will struggle. In this episode, we share 10 principles you can use to survive and thrive.
What you’ll learn
- 10 Principles for surviving and thriving in a down economy
- Why Productive Paranoia helped Bill Gates thrive in difficult times
- Why you should probably cut a lot of your physical product lines
- How the Star Principle applies and more importantly, when to use it
- What your product mix is and how to optimise it for a downturn
- The right time to push for market share!
- The big opportunity that comes from running your business well, while others start to fail
- The importance of timing your moves
Resources
- The Star Principle, Book by Richard Koch
- Pixie Faire, Jason and Cinnamon’s primary business
Some of the resources on this page may be affiliate links, meaning we receive a commission (at no extra cost to you) if you use that link to make a purchase. We only promote those products or services that we have investigated and truly feel deliver value to you.
[00:00:00] Michael: you cannot raise money from a bank when you need it. But if you go into a bank and you have say six months worth of cash reserves, and you feel quite good about life, the chances of you getting another, three months worth or something, not only based on the economics, but they’re based on your attitude and how you come across and you will feel more confident in my experience with plenty of cash in the bank as well.
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[00:01:19] Michael: Running an e-commerce business in an economic downturn can present intense challenges. Some will thrive and grow. Others will struggle, or frankly, a few will sadly go to the wall. In this episode, we shared 10 principles. You can need to survive and ultimately thrive in a. Jason, you ready to roll on this important topic?
[00:01:36] Jason: Yeah. This is a great topic to dive into. As we think about what the economy is doing broadly and where things might go, obviously the stock market’s been crushed the last month, will. Economic, markets, sour and will people will be living in an economic downturn in the near future.
[00:01:52] I don’t know, but this is important for us to think through. And, and so you’ve got some principles, you’ve got 10 principles you want to walk through with us, that we’ll use as sort as a framework and, a, outline to talk through the topics. Why don’t you, why don’t you lead us into it, man?
[00:02:05] Michael: So this is a framework for discussion because it’s a huge area. And, the response to a multifactorial complex environment has to be multifactorial, but I’m trying to keep it as simple as possible so that we can go in have some things to hang other things on as it were.
[00:02:19] So the first principle, I’ve going through from the point of surviving. Let me just do that clean again. I’m really going through from surviving and getting through the short term to then try to be in a position to thrive in the long-term really. So that’s the kind of order of events I put in.
[00:02:33] So the first principle is price for profit. It’s very easy to price for market penetration. Especially on a marketplace like Amazon really encourages it and. You’re not really focused on profit, you’re focused on market share. And that is a very dangerous thing to be doing in my opinion, in a downturn or potential downturn.
[00:02:51] And to your point, Jason, I’m really glad you made that there can be downturns within certain markets while other ones. Boom COVID was an extremely. Extreme aversion of that. When I had, people in the mastermind selling, medically related equipment that went off the scale and then people in the travel niche where it tanked 80%.
[00:03:08] So it is me specific. But if there’s a downturn in your specific niche, I think you need to price with profit. The profit then becomes part of your cashflow, which is one of the ultimate protections in a downturn.
[00:03:17] Jason: So price for profit. Does that mean to you? You mean raise your prices?
[00:03:22] Michael: Honestly, it means don’t, I suppose it’s a question of focusing on letting us focus on profit rather than market penetration. And I would say, for example, if you’re launching a new product, then that’s not going to be so much the case, obviously you price for penetration, but that’s also an, a hint that you may be not thinking so much about pricing at launching new products into a difficult market, but rather consolidating your position in the.
[00:03:45] Jason: Yeah, it’s interesting. Isn’t it? Cause I guess you should start with the question of, do you already have a price optimal strategy for, struggling or downturn economy? Maybe you already have the price optimal strategy. And I think generally though, but what’s happening in, in a downturn economy is people look for low price, alternate.
[00:04:03] If people are struggling financially, they’re going to look for the same thing they wanted just cheaper and that their mind will shift towards cheaper, substitutes. And so that’s really the question is where are you positioned against your competitors? I think in terms of your pricing, and that low price alternative, approach I think is, it is interesting.
[00:04:22] So I guess I would say, pricing parody is important being. Being, positioned against the high price leader, maybe the high price leader, w you just can’t lower their prices because they have structural costs that won’t allow it, in a time of economic downturn, I would say this, I don’t think you want to be the high priced.
[00:04:40] Those are strategy questions, and this is why every buddy’s business is different and unique and you have to think through what’s potentially possible in my context with my competitors and that kind of thing. Yeah, that’s a great first place to start those pricing.
[00:04:52] Michael: As you said, there’s a lot of nuance and obviously you’ll, you have a lot of expertise and a lot of these sort of more MBA type questions, as well as, years of experience, I would say, yes, it’s not one size fits all.
[00:05:03] Pricing for profit is a sort of stuff. Broad phrase. It doesn’t necessarily mean the individual units should make more profit than, they did before I downtown, for example. And as you say, you have to position against your competitors, but you do need to make sure that you’re focused on getting a profit for the machine as a whole, as well.
[00:05:22] Jason: Yeah, totally agree. Okay. What’s your second principle. Second principle
[00:05:25] Michael: is using stock wisely. So again, this is, related to the previous thoughts. And again, it’s more of a focus thing than necessarily a drastic change. As you say, many people’s businesses may already be well set up for a downtown, but I observe a lot with my clients that they’re not always necessarily, especially the Amazon focused.
[00:05:42] They often use stock as if it’s infinitely replaceable. And of course, when you have a supply chain crunch globally, which. Some extent still have, or could have particularly, if the situation in Europe developed further, we don’t know where that’s going, but that is not a situation in which he wants to just be Gaily throwing a stock out of the door.
[00:05:59] And in again, chasing market share, you want to think mindfully about the balance between the cash flow. Like you’ve got to turn your stock into cash versus your need to create profitable business. And. All I would say is using stock wisely sounds a bit vague, and I suppose it is quite broad, but I think you have to be very mindful about that.
[00:06:16] Again, I would use stock to maximize profit, all things being equal. So you don’t just sell all restock because you’re going to go out of stock. For example, you might raise your price instead as a way to prevent going out of stock. And that means that you make more profit on that particular set of inventory, et cetera, et cetera.
[00:06:33] Jason: And so the idea here is that your stock is going to be potentially. Harder to come by maybe supply chain problems. Maybe you just need to be able to stay in the game longer. Maybe you need to make sure that you don’t liquidate things and blow out, your inventory with low prices, with the, with the concern that maybe you’ll have a harder time, sourcing, maybe the pricing of your inventory will go up on the back end and you’ll go from marginally good, profit margins.
[00:06:59] Problematic. So that’s, I guess the stock piece is interesting. This is not my cup of tea, for sure. I don’t think about stock in the same way that you do, because I think about digital products and digital crops. Of course, we have that back in, Award limitation. But so this is interesting.
[00:07:15] Okay. So this is great. Okay. What’s principle number three.
[00:07:17] Michael: Principle number three is cut early and cut ruthlessly. Now, before the show, you and I talked a little bit about product mix and I suppose this is really where I’m going with this, but it could also be sales channels in eight time.
[00:07:28] Where things are harder. You don’t want to be too experimental. So if you’ve got a direct to consumer site and you sell an Amazon and the DTC site is going to take a lot of love and care to build, and, it’s not returning that love and money right now, then I’m not saying you should kill it, but you should probably put it to, to maintenance mode or something like that.
[00:07:45] But more commonly, I would say an awful lot of people I work with have a very big range of skews. And one of the people has, I don’t know, two and a half thousand skews, maybe 300 on Amazon. And of those. I said, I’ve watched you do an 80, 20 analysis and best. And we went away and actually did one, came back with a graph where he’d done.
[00:08:00] It will need in about 10 of his products, gave half of his profit. And really what that implies to me, the flip side of it is that he’s taking an awful lot of money up in stock. That’s moving slowly or maybe moving, but not making much profit. And I think that now is the time coming into a potential downturn.
[00:08:15] Again, it’s market specific to be willing to ruthlessly cut those, sell those through and reallocate the cash where it actually gets a better return.
[00:08:23] Jason: Yeah, this is, reminding me of the old phrase. Warren buffet uses when the tide goes out, you see who’s swimming naked, and I guess as it relates to, cutting costs and focusing on your profitability and your business.
[00:08:36] A P and L view of your, of your business and asking the hard questions. What have you been blowing money on thinking about expanding or what have you been trying to invest into that you need to really shore up and think about, being more, wise with your expenditures at the same time. And I don’t disagree with this one because you do need to cut waste out of your system.
[00:08:59] But economic downturns are a fantastic time to be the advertiser, to be the acquisition, hunter to buy businesses and to, spend money on advertising. It’s in the economic downturn. When everybody else is collapsing. If you’re a powerhouse, you push your advance. And that’s a really important strategic level think thinking, exercise is.
[00:09:22] Am I strong right now. And if there’s an economic downturn, can I still be strong? And if so, will my competitors be weak? And if my competitors are weak, what do I do? And you, maybe you buy them, maybe you advertise twice as much as they do. All of those kinds of ideas start to come to mind. And that’s the reason you want to be lean mean, and focused on, cutting wasteful expenditures, in, in, in working through your profit and loss statement.
[00:09:43] Michael: Absolutely. And you’re right to say it’s about the wasteful advertising, wasteful product lines, wasteful sales channels. It’s not about cutting per se about cussing ruthlessly. I suppose the reason that I focus on that without giving the implication, you shouldn’t cut. Everything is most people are just not willing to let go of product lines ever.
[00:09:59] They say run their product lines forever. And when they are physical products is video. The people. Focused on that, then that ties up cash. And that is a wasted opportunity. And to your point, if you can run your business much more efficiently than your competition, if they are stuck in that sunk cost fallacy, and you’re willing to be recessed and cut after a few months or a year, or even shorter time, you should have spare cash.
[00:10:21] And as you say, then you can go on a shopping spree potentially. And that’s one of the later principles. Yeah, you’re absolutely right. It’s cutting waste, not cutting everything.
[00:10:27] Jason: I totally agree. I love that. Okay. Keep going. What’s your, what’s your fourth?
[00:10:32] Michael: Principle for stash the cash. You should always be, I think, in any business mindful of having a good cash cushion and you look at some of the great companies that are from the Jim Collins book, whose title escapes me right now, but the one that’s focused on the, companies that grew very well in.
[00:10:45] Choppy waters like Microsoft, et cetera. They have a famously, a 12 month cash cushion, and I don’t think there’s a coincidence that they have been one of the biggest companies in the world for a very long time. And obviously you’ve got to grow that over time, but I think having a mentality of growing cash reserves and using cash with extreme wisdom and focusing on cash flow, not just profit and loss is really critical than that.
[00:11:05] Jason: Yeah, I totally agree with this one. There are a lot of little downturns that you can, realize you needed more reserves for out of cash. We work with our charity in a currency exchange and even although the world might be, not experiencing an economic downturn, if the two currencies you’re working in have a, a substantial.
[00:11:26] One way or the other, you can need a lot of cash sitting in reserve. And one time I was in a conversation and, I said to. Somebody, Hey, we have basically like a three months reserve and they were like, we have a nine month reserve. And I was, and we were basically doing the same kind of business.
[00:11:42] And I was like, oh, they basically have a more pessimistic maybe mindset than I do, but maybe a wiser mindset and what I would hate. And what I said to them was I would hate for my optimism about the future to, put my businesses. Just because I’m a future positive thinker in the time paradox book, a framework that doesn’t mean I should put my business at risk.
[00:12:09] And it’s something to think through and having a good, solid cash reserve is vital. I remember just one last comment and then I’ll kick it back to you. But I remember in my favorite book, growing a business by Paul Hawkin, he makes one comment about money in that. Raise it or get it, borrow it before you need it, because once you need it, it’s incredibly difficult to get whether you’re trying to get a loan or investment capital from somebody when you actually need it, like you’re in desperate.
[00:12:39] That’s when nobody wants to give you any money. And you want to raise it when you’re, in the positive, upbeat, momentum mode of your business. So stashing the cash I think is vital. Yeah. Yeah.
[00:12:49] Michael: I guess the other way of looking at it, if a couple of responses, first of all, I guess it’s that old Greek Aesop’s fables and make hay while the sun shines.
[00:12:57] So in other words, you could just laze around and enjoy the fruits of your labor is when life is good. But what you really should do, I think is, do that to a degree of course, but you should also recognize that life will not always be good. It will go through up and downturns for the rest of your business life.
[00:13:08] And. Jerome for long enough, you’ll see dramatic down, sends a dramatic upturns. I mean like the last two years over COVID have been both right. In a very compressed form. So yes, stashing the money when life is good. The other thing is to your point about pessimism or future positive, the phrase that bill gates used, obviously the CEO of Microsoft for a long time was a productive paranoia.
[00:13:27] So thinking. In a useful, helpful way. Not sitting around being chicken little, he built a giant company. Obviously he had courage and vision, but also what could go wrong. And then how do we protect against that? And one of the best protections financially is just a huge stash of cash. And it also a final point on that.
[00:13:44] I think it changes your mentality as you. A hundred percent correctly, you cannot raise money from a bank when you need it. But if you go into a bank and you have say six months worth of cash reserves, and you feel quite good about life, the chances of you getting another, three months worth or something, not only based on the economics, but they’re based on your attitude and how you come across and you will feel more confident in my experience with plenty of cash in the bank as well.
[00:14:07] Jason: Yeah, totally agree. Okay. Let’s keep going. What’s your, what’s your favorite. First
[00:14:10] Michael: principle is then moving more towards the, from the surviving to thriving mode and thinking, as you said about the potential of expanding, the truth is a couple of thoughts that are, I think, incredibly positive.
[00:14:21] If you can get through the difficult times. First of all, many massive businesses were started in with sections, including say Microsoft. The second thing is when markets are smaller, they are. It’s the easiest time to get market share. And the time you want to be going, trying to dominate a market is not one it’s giant and growing fast.
[00:14:36] It’s when it’s smaller, because it’s been knocked back and then it’s much, much easier to take market share. And in very concrete sense, for example, advertising costs are going to be somewhat cheaper than most of your competition is wiped out temporarily in a niche and is not advertising or they’ve pulled their horns in and aren’t advertising much.
[00:14:52] As you said, early adjacent. But I would say before you start, going on a spree, keeping your powder dry and waiting for the right moment is really important. So I think having plenty of cash and a good investor in the stock market, looking around for opportunities, looking at potential acquisition targets, potentially if you think that there are some businesses in your space that would make sense to, to bolt onto yours or whatever, it may be taking IP from somebody who’s selling their business and paying for that.
[00:15:18] Oh, other things like that, but I think taking time to look at the opportunities, but not acting impulsively is really important if you’re actually gonna, take advantage of a situation like that.
[00:15:29] Jason: Yeah, totally agree with that one. And to my initial point at the beginning of the show, even just having money to spend on advertising, when your competitors advertising falls off, can you fill the void and take some market share there?
[00:15:40] Yeah. Okay. Let’s keep going. Let’s principle number six.
[00:15:42] WARPUP: Hey, folks! Thank you so much for listening to another episode of the e-commerce leader. Hopefully you finding this a useful topic. Downturn is never fun to think about in the abstract. It’s always nice to think everything’s going to grow forever, but the truth is that things go through waves. And if you’re well positioned, you’ll ride out the tough times and you’ll be in a great position.
[00:16:02] Take advantage of when things starts to grow again. So today we’ve really focused on the first few principles, which are really about surviving the bad times and even thriving during the tough times every business I’ve ever worked with at sooner or later, it goes through some kind of downturn within the business.
[00:16:19] Sometimes that’s within their micro markets. Sometimes the broader economy has challenges and headwinds are certainly a lot going on geopolitically at the moment, as we all know. There’s lots of things pushing towards inflation and et cetera, et cetera, but we are not hopeless consumers of news we’re entrepreneurs, and we can adjust and change again and again, until we have trimmed our sales, according to the type of weather we’re sending in to, to use and not to come at four as befits somebody in Britain where we have a lot of coastline.
[00:16:45] Great sailing tradition. Hope you’ve enjoyed the show as ever. Don’t forget to all of the show in whatever social media channel you see it. If you’re on the podcast apps, then on Spotify, you can leave a rating, which is just a 1, 1, 2, 3, 4, 5 star rating very quick and easy to do on apple podcasts.
[00:17:01] You can leave a rating and you can even write a review of, you can take the extra 30 seconds. We’d be really grateful for it. Finally, don’t forget to join us in the calling app where we now have two of the three weeks. Content streams. We have the hot takes with Chris green, Carl hammer, Jason Miles and myself, Michael VZ.
[00:17:18] And we also have the deep dives that Jason and I do each week now, also on the call-in show C a L I N. Just look for the app on an iPhone near you. Thanks so much for following us and thank you for giving us your time and energy, much appreciated, and we hope that we can help you survive and thrive in these challenging times ahead.
[00:17:37] Thanks for listening.
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