As inflation continues to rise amidst worsening economic conditions in Nigeria, businesses are struggling to stay afloat, and consumers’ purchasing power is diminishing. Recently, a baker informed his patrons that he would be shutting down the business and laying off over 25 employees due to rising operational costs and the resultant dwindling profits. “There’s a limit to how much loss the business can absorb or how much product prices can be increased.”
This baker’s situation is unfortunately not a one-off; many SMEs are struggling to remain profitable in the economic recession. These smaller businesses do not have the cash reserves to adjust or absorb losses endlessly compared to their bigger counterparts. Can small businesses survive and even grow in a challenging economy?
In today’s article, which marks a year of sharing my business insights on ThisDay, I will share four steps your company should consider during economic downtimes to survive and perhaps even grow:
Focus on core competencies and introduce value add streams
Look at the numbers – what actually sells best with little marketing and/or production cost? Scale back to those products and/or services that already perform very well with your customer base. Using sales data to determine the core products is crucial. It provides an unbiased view; business owners often have their favourite products or products they believe should do well that may not align with actual consumer demand.
During this period, rationalise all other less profitable product lines that require expensive support. Concentrate your efforts on producing and promoting the products that are guaranteed to fly off-the-shelf to past, current, and prospective customers.
After identifying the core products, increase revenue streams by adding VIP and ‘economy’ versions of the core product or service. One aspect of this concept is satchetisation, which reduces the size of products into more miniature, economic single-serve packs. However, businesses rarely implement the other side by introducing luxury or perceived luxury versions.
Let’s look at the case of a popular bakery- its most popular product is cake. In addition to its standard cake price list, the bakery introduces a flat fee cake size/design for N5,500. Customers can walk-in and purchase a nice tasting occasion cake for under N6,000 without needing to pre-order. On the other hand, they also created speciality cake designs at an additional price that cater to individual customer’s specific design or flavour requirements. With both ends of the market covered, this bakery can maximise all the potential revenue streams of its most popular product, occasion cakes.
Make small cuts early and protect cash flow
Business conditions during economic downturns can result in slimmer profit margins and difficulty maintaining a healthy cash flow. Small budget items add up to high costs even though on their own are not significant. Audit all monthly expenses and strip out all unnecessary spending – let go of services, resources, dormant equipment, or subscriptions that the business can function without.
Rethink how much value the business is extracting from assets it is holding on to – consider renting out unused extra office space or delivery infrastructure for additional revenue. Run the business on a “pay-as-you-go” model. This means you make all non-essential business expenses based on corresponding sales. Limit reaching into the reserve to settle non-essential bills and renegotiate supply agreements to get competitive pricing, discounts, or flexible payment terms on essential items.
Adapt your pricing and marketing strategy
A business pricing strategy during an economic downturn should play to the psychology of consumers. Most consumers respond to discounts while getting value for money. A study by Kahneman and Tversky about choices, values, and frames found that when presented with two scenarios:
Case 1: a 10% discount on an item causing a reduction of $5
Case 2: a 5% discount on an item causing a reduction of $5
A 10% discount resonated better even though it should not since the quantitative value received is the same. This is because discounts provide an additional utility, apart from the acquisition utility acquired from the exchange of money for the product or service. This additional transaction utility appeals to the psychological aspects of a consumer’s mindset and makes (more) discount special.
While your marketing shouldn’t be pushy or insensitive to the tough times, your marketing content should highlight the immediate benefit of the consumer taking any action. Use precise language and call-to-actions (CTAs) to allow the consumer quickly connect and feel psychological ownership for the product, leaning on a perceived loss of value/opportunity if action is not taken.
Improve customer experience
As discretionary spending reduces, consumers will cut down on their spending, and it is a lot more difficult to convince new customers than it is to maintain current customers. As economic constraints continue, businesses should rethink their marketing strategy; focus on retaining and increasing customer lifetime value through targeted marketing and positive customer experiences.
Encourage your customers to share their experiences and use social proof to push your marketing efforts. The benefit of this strategy is that customers share experiences, and word-of-mouth/referrals are a low-cost way of getting more customers to try your products.
Depending on the type of business, adding loyalty points, and rewarding repeat customers can be a way to ensure repeat business. For service-based companies, reach out to past customers, understand why they stopped purchasing and implement strategies to get them to re-engage.
The economic downturn has been brutal for any small business, but it is essential to plan and remain strategic to capitalise on this opportunity. Assess the risk to your business and market sector, identify your most critical suppliers and distributors, and streamline costs as much as possible.