November 21, 2014

Four Mistakes Entrepreneurs Make in a Recession

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Now that the evidence is pretty strong that we’re headed into an economic downturn (or are already in one), I thought I’d identify some mistakes that many entrepreneurs make in bad economic times.

1. Failing to take advantage of decreasing costs. Most businesses are both suppliers and customers at the same time. To provide its product or service, your business needs to purchase the inputs and materials that you use, and you need to hire people to make your product or service. When demand slackens, your suppliers are hurting too. So often you can strike a better deal to cut your costs by paying your suppliers less or hiring better people at a lower cost.

2. Thinking the only way to increase demand is to cut price. Price cuts aren’t the only way to stimulate demand, and they aren’t the best approach for entrepreneurs. On average, entrepreneurs are more successful when they compete on service, quality, or something other than price. So shifting to price cutting in a recession is often a losing strategy for entrepreneurs.

3. Failing to recognize increased competition. In a recession, competition accelerates because more businesses are chasing less total demand. In addition, when unemployment rises, people start businesses because their opportunity cost of doing so goes down, further increasing competition. So the need to have a competitive advantage is even more important in a recession than in a booming economy.

4. Forgetting that some products, or even whole businesses, are counter cyclical. When customers cut back on their spending, they often substitute one product for another. For instance, in a recession, people might cut back the number of steak dinners that they eat out. But, because they still want to treat themselves, they increase their purchase of cheaper foods, like pasta, making pasta a counter cyclical product. So, entrepreneurs need to avoid assuming that demand for everything goes down in a recession.

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Professor Scott ShaneAbout the Author: Scott Shane is A. Malachi Mixon III, Professor of Entrepreneurial Studies at Case Western Reserve University. He is the author of nine books, including Fool’s Gold: The Truth Behind Angel Investing in America ; Illusions of Entrepreneurship: The Costly Myths that Entrepreneurs, Investors, and Policy Makers Live By; Finding Fertile Ground: Identifying Extraordinary Opportunities for New Ventures; Technology Strategy for Managers and Entrepreneurs.

35 Comments ▼

Scott Shane


Scott Shane Scott Shane is A. Malachi Mixon III, Professor of Entrepreneurial Studies at Case Western Reserve University. He is the author of nine books, including Fool's Gold: The Truth Behind Angel Investing in America ; Illusions of Entrepreneurship: and The Costly Myths that Entrepreneurs, Investors, and Policy Makers Live By.

35 Reactions

  1. Hi Scott,

    Good article thanks, I would add:

    “failing to use creativity in your marketing” – most people just increase and decrease their price, but you can do many other things which would set you apart from the competition. I would use creativity and out-of-the-box thinking.

    I think the best way to sell more is always to increase the perceived value of the product, the is the most fundamental thing in your marketing.

    Lasse

  2. I agree with the items listed and with the comments. Those are all things that are easy to overlook. But I think the thing most entrepreneurs overlook is the economic downturn itself. They often under-react, or way over-react. On the one hand they may think, “Oh, this won’t affect me because of….” Then go on their way without making adjustments. Or, on the other hand, they think, “OMG, the ship is sinking, so I’d better….” Neither of which is good for the long-term health of the business.

    A measured response to any crisis (large or small) is the best policy.

  3. Scott,

    Excellent blog. #3 in particular almost put us out of business. We were very busy for many months trying to overturn that situation.Make no mistakes,too much competition can kill you.

  4. Interesting food for thought. As things get tougher, these are good points to keep in mind. I do think rash decisions of pulling products or downsizing can create more problems than just sticking it out.

  5. These are good thoughts and another couple of areas are:
    1. Failing to work hard at retaining your key customers
    2. Failure to have an effective marketing plan in place get you through tough economic times

  6. I have worked with purchasing and cost analysis, so I know about point #1.

    Shane: I looked into the possibility to import instant (ramen) noodles from Asia and then export it to Estonia in the beginning of the 90’s. Maybe it is time to ship over cheap fast food to the United States of America? ;)

  7. Interesting read..

    Something tells me you’re not that far off Martin..

    Interesting game I found on AOL’s money page.. maybe you’ll all enjoy it.. it’s set up like the college sports tournament.. it’s a fantasy stock picking game.. a few buddies of mine get in on it every year.. maybe you’ll all enjoy it too..

    http://www.smartmoney.com/marketmadness

    Good day to you all..

  8. Tom Wilkes,

    Thanks for link to the stock picking game. We had stock exchange competition (paper trading) at Southern New Hampshire University’s Economics & Finance Association and went to trips to the financial district in NYC. Jonathan Hoenig’s Tradecraft columns are interesting to read.

    http://www.smartmoney.com/tradecraft/

    All the Best,

    Martin Lindeskog
    SNHU.edu ’00

  9. 5. Cutting back on your marketing as just another “extra expense.” With greater competition comes greater need to get the right message out to the right people.

    6. Failing to position your product or service as a necessity, rather than a luxury that people can do without.

    Nice post!

  10. Susan,

    Good additional points. I myself know how valuable those repeat customers can be, especially during slow times.

  11. Just read a post today on how people are shopping more at TJ Maxx and Ross-stores that are known to be cheaper than Macys, etc.

    Very counter cyclical.

  12. This is a really interesting and useful post. In particular point 4, I think.

  13. Interesting post! Things will get tough at some point (recession?) so these points will come handy.Thanks for sharing!

  14. Scott,

    I found these points of yours so well-stated that I’ve quoted you twice in my copywriting and marketing newsletter. You can find the article where I included your remarks in the “website” area of this comment.

    Thanks for the perspective. Your steak dinner versus pasta example really hit home for me.

    Dina

  15. (PS – by “website” I mean if you click my name.)

  16. Hi Scott,

    I meant to compliment you the other day on this article, but I got sidetracked. I especially agree with point #2.

    I’m reminded of something Warren Buffett once said in one of his annual shareholder reports, to the effect of “sometimes in business it’s wiser to sit quietly in a room.” He used it in a different context, but the underlying point applies: you may be better off not having a piece of business if you have to cut your price.

    Best,
    Anita

  17. Trying to get in touch with Raymonda regarding comments regarding Four Mistakes Entrepreneurs Make in a Recession. I’m working on an article for a magazine regarding this topic and would like to talk to Raymonda. Please contact me at pstrozniak@yahoo.com
    Thanks.

  18. In a recession, you’ll find plenty of great people for the taking because of layoffs, reduced pay, and less desirable jobs.

    IMHO, simply having a talented staff on your team puts you heads and shoulders over your competitors; stocking up on them should gain your company a major head start when you get through the recession.

  19. These are great points here. Scott’s spot-on. It’s very easy to go into a shelter mentality when budget forecasts begin to get gloomy. These points are good reminders for us all to keep in mind.

  20. Insightful article, I very much enjoyed reading. Keep up the good work/

  21. I agree on the more competition.
    You just have to work harder in this economy.

  22. Scott,

    This is a fine post – my fave is your #4 – That’s where the opportunity in recession lies. :)

    Cheers!

  23. Wonderful article Scott. One thing I believe that can be added is the effect on thhe entrepreneurs once the economical downturn is over. How can the entrepreneuers be ready with a strategy so that they can face any econoimical situation. After all, tyhe main aim of the entrepreneurs is to earn profits at any point of time in the business. What are the skills the entrepreneurs should possess to control that ?

  24. I would add, that you keep your employees adequately informed of the company’s position. Downsizing, cutting back, getting leaner – what ever you call it can be very demoralizing to employees who rely on the rumor mill for their information. The word on the street will be that you’re on your way out when in reality you are just adjusting to market conditions to stay healthy. Effective and regular employee communications will reassure staff that the ship is in order. Rumor can murder a brand.

  25. nice, i agree with apple roof cleaning the more competition the better the product and the harder you work.

  26. While in a recession most of our competition slashed prices and chose to work for table scraps. We chose to increase marketing value, and zero in on customers wants and needs. There are far many more options out there besides cutting prices.

  27. Great article! How about learning to work with your competition? Make money off of each other.

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