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By Ryan Garrow, Director of Partnerships & Client Solutions – Logical Position
So, we’re facing a down market…now what?
While doing my planning for my MivaCon 2019 talk last year, I was of the opinion that our US economy was due for a pullback. Not because I saw compelling data, but based on history–what goes up must come down a little at some point. So I outlined the Logical Position speaking narrative around what businesses need to do in a down economy. Looking back, the data was solid, but my timing was a little early. In this article, I will be delivering a high-level overview of the data and strategies I have collected about withstanding an economic downturn.
Let’s go back to the year 1929. The economy is on fire…no business can fail. Everyone is getting rich investing in stocks! The roaring 20s have been great and the expectation is that the 30s are going to be even better. Then, Black Monday/Tuesday came…over 24% of the Dow Jones value was erased in two days. By July 1932, the stock market had lost 89% of its value.
Not all companies failed, not all fortunes were lost. What makes sense for 2020 is to look back at companies that grew through the depression and analyze what they did differently from their competitors. Hopefully we can glean some insight from them that we can apply to each of our unique situations.
In the early 20th century, Ford was by far the dominant player in the automobile industry. Henry Ford had created an unbeatable model of production: the assembly line. He had vertically integrated the Ford Motor Company so that he owned every stage in the production process. This included rubber plantations, coal mines, logging operations, iron-ore mines, a fleet of ships, and a railroad. He made sure that Ford would always have raw materials and parts when they needed them (and at a cost lower than their competitors). In fact, despite offering only one model and one color, Ford accounted for almost half of all cars sold 1920 to 1926.
Enter Walter Chrysler and, officially in 1925, the Chrysler Corporation. Walter Chrysler had big dreams and wasn’t afraid to take risks and go against Henry Ford. In fact, because it was relatively easy to borrow money at the time, Mr. Chrysler was able to get $60 million to buy out the Dodge Brothers in 1928.
By 1933, Chrysler was the second largest manufacturer of vehicles in the US behind only GM (a position they would not give up until 1949) and by 1937 was debt-free. In fact, Chrysler was the first of the ‘Big Three’ car companies to hit their pre-depression production volume, which they did by 1933. GM hit theirs in 1937. Ford, on the other hand, went the opposite direction. Ford had significant issues getting through the depression and wouldn’t achieve their pre-depression production volume until 1957.
What caused this massive shift in the automotive world and what can we take away from it? In 1929, the automotive industry had over $400 million of profit (Ford alone had $40 million of profit in 1930). But, from 1929 to 1932, automobile sales fell by 75% and car companies lost a combined $191 million in 1932 alone (Over $3 billion in today’s dollars). While most of us don’t have to worry about vertical integration of the full production supply chain, in the ecommerce space we can find guidance for our next steps in the automotive industry of the 1930s.
The biggest question for many companies is what to do about marketing. Ford had huge overhead to contend with and cut marketing budgets. They also cut dealers that were spending $3 million a year on Ford advertising. Chrysler did make cuts in appropriate areas but got aggressive in marketing. They even used celebrities like Shirley Temple to advertise their cars. Rather than hunker down and try to ride out the depression, Walter Chrysler got creative. The void Ford left when they cut dealers allowed Chrysler to capitalize and scale dealers. With Ford dealers and Ford cutting advertising, there were cheaper ad positions Chrysler was able to fill.
In 2020, we have some significant advantages in marketing versus the 1930s. We can track direct response to our online advertising. Many companies need to consider how to take a proactive approach to seizing market share during a downturn. In the ecommerce world, this often comes through paid search. SEO is great, but if you don’t have lots of organic traffic already, you’re not going to get it quickly (note: there are a few SEO tactics, like category level content, that have the potential to move the needle within a couple weeks). If people are searching on Google, Bing, or Yahoo for your product or service, it makes sense to get in front of them for the right price.
Many companies fail when it comes to marketing because they see marketing as a cost center, rather than a customer acquisition center. Every business and industry is unique, so there is not one single answer that will work for everyone. However, based on my decade of experience as a CEO, digital marketer, and business owner, I know that most companies are not aggressive enough when it comes to gaining new customers. Many business owners will default to cutting costs—marketing being one of them. By taking away the avenue through which new customers find you, your business can only focus on existing customers. These customers may be cutting back on their own expenses and not purchasing what you’re selling. In this scenario, you have inadvertently hamstrung your business in an already difficult time.
Instead of defaulting to cutting spend, explore ways to drive new business to your online store. Paid search can be a great way to reach new audiences during this time. In the ecommerce world, paid search often does not take any cash out of the business. In fact, most ecommerce paid search accounts that Logical Position runs will put sales dollars in the bank account before the credit card is charged by Google or Bing. Historically there have been few (if any) marketing strategies at scale that allow for revenue to come in before the bill for marketing. Let’s say for example that your business spends $200 per day marketing on Google. That ad spend generates $1000 in revenue. Most merchant processing accounts will put the money into your bank account the next day while Google charges your credit card every $500 (for most accounts, not all). For most businesses, credit cards can be paid within a couple weeks of the month’s end with no interest. By that time, you should have more than enough in the account to pay off the credit card bill.
While many businesses see paid search as a profit center, I challenge them to reconsider that approach and look for paid search to bring in new clients at the highest rate possible for the company. Take into consideration inventory, supply chain, and margin. Your non-brand campaigns should be spending down to break-even for new customer acquisition on both shopping and search. Your brand campaigns will bring in profit (except in rare circumstances). Look at non-brand searches as customers that are available for the taking. They are going to choose you or your competitor. When it comes to paid search on Google and Bing, oftentimes the customer goes to the business that is most aggressive with their goals on paid search. There are times when the smaller competitor must pick and choose their battles on searches, but there is opportunity during a downturn, as larger competitors will be evaluating marketing spend. Many of them will default to cutting back budget. This presents a HUGE opportunity for competing businesses.
Walter Chrysler is famous for the quote, “No matter how gloomy the outlook, I never cut one single penny from the budget of our research department”. During the Depression, Chrysler committed to the kind of continuous innovation that Ford really struggled with. They built the first wind tunnel for testing car aerodynamics, giving them a significant advantage as the New Deal caused more highways to be built and created the need for faster, more powerful cars. Chrysler also innovated tremendously in production, allowing them to produce 50% more cars per hour than Ford and GM. This gave them the largest profit per unit, which allowed them to adopt aggressive marketing tactics that competitors couldn’t keep up with.
“Companies need to innovate during an economic downturn. For some, this is innovation in marketing. Thinking of new ways to get their product into the hands of potential customers. For others, this is finding new partners to help grow each other’s businesses.”
Some businesses that have built a solid business in retail space, selling other companies’ products, need to create their own products to build a brand of their own. Some companies need to innovate in the shipping/logistics space. Other companies need to look at their business from an entirely different perspective. The last downturn reshaped many businesses and industries because of innovation. Don’t be afraid of change, but also don’t innovate for innovation’s sake. Test and measure everything.
Beyond increasing marketing and innovating, some companies haven’t even covered the basics of a successful ecommerce business. Use this time to step outside of the business and figure out what you could be missing. Many companies don’t have basic loyalty programs, customer review collection processes, email programs designed to increase customer lifetime value, or a plan for consistently improving their storefront and user experience. Start looking into these areas—you may find that it’s time to start evaluating some of your top-level business strategies.
About the Author: Ryan Garrow is the Director of Partnerships & Client Solutions at Logical Position. Business growth and strategy conversations are some of his favorite topics and his recent article covers what his businesses are doing to thrive during the economic downturn. To discuss your own business’ growth and marketing strategy with Ryan, feel free to schedule a meeting. Be sure to mention Miva to get the Miva special.