Why I Appreciate Recessions

There is nothing like a recession to create new opportunities. Well, maybe one thing is better: a depression.

When recessions hit, most companies go into turtle self-defense mode. They worry about getting crushed by the bad economy, not how they can get across the road ahead of their competitors. Senior managers pull their collective heads back into the shell. They stop moving forward.

This is why a recession offers a great opportunity for you to move ahead of the crowd. It is during recessions that companies that weather the storm solidify their positions in their industry. Also, newer companies that have adopted aggressive advertising strategies, but have maintained tight controls on expenses, replace those that assumed “sunshine forever.” Sunshine is never forever.

The U.S. economy was in boom mode from 1993 until 2000. That was long enough for senior managers to forget about recessions. We all tend to think that good times are our just deserts, whereas bad times are temporary and happen to the other guy. We assume that the world is designed to make things better for us personally. So, we tend to forget that what goes up eventually comes down. Yes, even the dollar. We do not prepare for the down time.

Then recession hits. This can be the best possible scenario for companies that are prepared to take market share away from competitors. Fear motivates competitors to cut costs, especially advertising and marketing costs. They see response rates dropping, or even worse, they have no way of tracking response rates. So, they fear launching a new advertising program because they suspect, but really don’t know, that their advertising money will be thrown away.

This is why firms that have adopted advertising techniques that have response devices attached to them — toll-free phone numbers, coupons, free email reports — have a tremendous advantage during recessions. They are set up to monitor responses, so they know how much bang for their buck they are getting from their various ad campaigns. They can concentrate on the ones that are still working.

This is why employees should know how their company’s ad campaigns work. Are these campaigns shots in the dark, the way that Superbowl ads are — ads that have no response devices? If so, then in slow times, the company’s decision-makers are likely to stop advertising, which means the firm stops growing. They are content to go into maintenance mode.

This is a mistake that managers should plan to avoid in good times, but rarely do. They should have an money in reserve for their advertising budgets, so that in times like these, they can make gains on their competitors. In good times, everyone in the industry is committing money to growth. The competition is keen. It’s difficult for any company to move ahead of the pack. It take luck to locate an ad campaign that works better than the competition’s in good times. But in bad times, it doesn’t take luck. It takes only a permanent advertising strategy that monitors results.

I say this as a member of the newsletter industry. In this industry, we have to monitor results. We cannot afford to send ads to lists of names that don’t respond. We learn how to monitor results. The catalogue industry is the same. We are always testing new lists, and making new offers to old lists. We adopt new direct-mail campaigns only after testing an ad on samples of the total audience. If we didn’t do this, we would go bankrupt fast. Postage costs keep rising. Printing costs don’t go down.

It never ceases to amaze those of us in the direct-response industry that in most industries, especially the big ones that advertise on television, the ads have no response devices. We watch it amazement as ads that cost $100,000 per 30-seconds appear on-screen, and they don’t ask the viewers to take an immediate step, such as call a local dealer to take advantage now of a special offer. Late night TV ads do this. So do infomercials. But prime-time ads rarely do.

So, when bad times come, most companies pull back on advertising. They go into defense mode. They start firing people. They may even cut their prices, re-positioning themselves as a discount source — a very risky strategy, because they may permanently lose their reputations as high-quality providers.

If you want to see an entire industry that is doing this, consider the airlines. Their ads don’t sell based on price. They don’t offer anything that their competitors don’t. They don’t provide a strong reason to fly them rather than a competitor. They just run feel-good ads, or, these days, no ads at all. This is a classic sign of an industry on the ropes.

How about your industry? Or company?

THE LIFETIME VALUE OF THE CUSTOMER

For a company to prosper, it must develop a stable stream of income that is based on customer loyalty. A good customer keeps coming back to buy more. This is why, in the newsletter industry, it is common for publishers to spend 100% of the first year’s subscription fee on acquisition, knowing that 80% of the subscribers will not renew. A full year’s subscription revenue for 100% of a mailing list is what the 20% who renew after one year are worth. They are what the paper-based publishing industry is all about.

The best time to make gains in your customer base in during recessions. Why? Because it is then that your competitors cut back on marketing. Those customers who are marginally committed to other firm can be tempted to try the product or service of a rival. But the rival must make his presence known. Most rivals are still in turtle mode. So, the customer base of each firm stays proportional to most of the others in the industry. But for a handful of producers, a recession offers a great opportunity.

When a company is facing a looming disaster, its managers worry about its survival. They look at its life expectancy and conclude, “this outfit may not have a future.” Everything they do from this point on is to survive. They put the company on life-support.

If you want to see an industry that is doing this, consider the auto industry. It is offering 0% loans. Now, admittedly, this is a way to get people into the showroom. Most people don’t qualify for a 0% loan. The salesman has a shot at making the sales pitch before he presents the statistical bad news to the customer that he just doesn’t qualify.

The auto industry is doing what it can to keep its work force employed full-time. It doesn’t want to shut down, since it will have to go out and hire workers later. Also, it faces unions that might strike over a shutdown. If a company can break even on its variable costs — mainly wages — it will sell its goods at break-even prices. The problem is, for a product with a cycle of five years, offering discounts this year cuts into sales next year. The auto industry this year is dealing with the effects of low-profit sales last year. Sales are way down, despite the bonus offers. Yet the auto industry is central to the American economy.

When you extend the life cycle of your product, you lower the lifetime value of your customer base. What you want is what Gillette has: lots of users of your product. Gillette sells razors in order to sell blades. The company knows that customers are loyal to the brand. Just ask the folks at Schick, who are constantly seeking ways to lure us Gillette people over. We don’t budge. It’s not worth our trouble. The rival blades are too competitive in price and performance.

A generation ago, an outsider, Wilkenson, attempted to gain a facehold in the razor blade market by offering stainless steel blades. These blades lasted longer. This forced Gillette and Schick to introduce stainless steel blades. This new technology shaved off part of the lifetime value of their customer base. I haven’t seen a Wilkenson blade in decades, but their attempt to break into this market did a great service for customers. It forced the other two companies to provide far better products. Anyone who can remember what life was like with Gillette Blue Blades in the 1950’s knows that capitalism has worked. I rarely cut myself today, unlike back then. A blade lasts for weeks. Shaves are smoother.

Gillette and Schick know that hair keeps growing, in recessions and booms. That’s the kind of business you want to be in if your goal is steady returns. The lifetime value of each customer is high. He keeps buying. Every ten years, I buy a new Norelco electric shaver as my touch-up tool. But, every day, I use a Gillette blade. Gillette has made more money from me than Norelco has.

It’s worth noting that Gillette’s stock fell by almost 50% in 1999, from $64 to $35, and is now at $30. This was a year before the tech stock bubble burst. The stock was $13 a decade ago, so it has done well compared to the high tech sector, where the lifetime value of the customer is low, except for Microsoft and a few others, such as Dell.

MICROSOFT VS. AOL

Have you noticed that Microsoft is actively promoting its MSN service? It is using that goofy butterfly guy as its logo. Bill Gates has AOL in its sites. Gates is not targeting anyone with a local ISP hookup. He is targeting the largest base of potentially disloyal ISP users: AOL’s customers. Those customers who are growing dissatisfied because AOL was originally targeted to non-Web users. The Web is now where the action is.

Gates knows that AOL/Time Warner is in turmoil. The stock has lost 70% of its share value. This has led Ted Turner to postpone the next $600 million of his promised $1 billion gift to the United Nations. (Hooray for AOL’s Steve Case!) Gates has plenty of cash because of the lifetime value of Microsoft’s customers. In the middle of a recession, Gates is spending tens of millions to take away market share from AOL.

There is no question that MSN is far superior to AOL. AOL will not get most of the switchers to come back. What is keeping AOL afloat are these three factors: (1) user inertia — the learning curve of a new ISP; (2) users don’t want to change their e-mail addresses, despite the vastly more powerful e-mail capabilities of any local ISP, coupled with Outlook Express; (3) it is very, very difficult to cancel AOL’s service. A customer may have to go to Google and search for “AOL” and “cancel” to find out how. What most threatens AOL is the expiration date of credit cards. If people move to MSN or some local ISP that offers technical support, they will not grant AOL the right to keep dinging their credit card every month after the card expires.

Gates held back on mass advertising MSN until now. Why? Because we are in a recession. AOL cannot fight back easily. It is living on the revenue stream of its existing customers. This is a mountain of money, but it has nowhere to go but down. All competing ISP services are superior to AOL’s antiquated format, which no amount of upgrades can change. AOL is locked into its pre-Web format.

I think the MSN ads are stupid. They offer no benefits to the potential switcher. They are tied to a parody of MSN’s logo. But, unlike all other ISP logos, this one is on every Windows-based computer screen. Fact: the most valuable piece of real estate on earth is the desktop screen of a Windows-based computer. So, the TV ad campaign may actually work.

HOW ABOUT YOUR CAREER?

What is true about companies is also true about their employees. In recessions, most employees go into turtle mode. They don’t try to develop new ways to make themselves more useful to their employers. They also don’t start home businesses. Yet the best time to start a new business is during a recession, if the business doesn’t require a big cash investment or a lot of debt. If you can buy used equipment, all the better.

My friend Art Robinson, a scientist and the publisher of the Access to Energy newsletter, recently bought a used $3 million printing press and support equipment for about three cents on the dollar at an auction. The owner had gone out of business. There were few bidders for that press in a recession year. Robinson uses it to publish a series of over a hundred boys’ novels, based on world history, written in the 19th century by G. A. Henty. Robinson had assembled a large mailing list of potential customers who had already bought all of Henty’s books on Robinson’s Henty CD-ROM for $99 — a terrific deal.

http://www.robinsoncurriculum.com

Now parents and grandparents can buy the hardbacks.

This is the way to do it. Use the other business’s economic crisis as a way to attract his customers. Offer them a better deal. Show them that switching to you or your company is wise. This is the way to (1) make yourself indispensable to your present employer, or (2) develop a home business that will become a full-time job if your employer doesn’t appreciate you, or else sells the firm to a new outfit that fires you.

CONCLUSION

The threat of a recession to managers is so great that they are afraid to innovate, to move forward. That’s why recessions are the dream come true for entrepreneurs who are trying to claw their way into an established market or create a new market.

You may think of this recession as a threat. Don’t. Think of it as an opportunity that comes around only once a decade. Start looking for ways to improve your share of the market, or launch a new, low-capital service business on the weekends. When everyone else is running scared, you can use this opportunity to make gains that are too expensive to make when the boom economy raises all ships. If you find a used rowboat at an action, buy it.

I started Remnant Review, my subscription-based newsletter, in May of 1974, in a year in between Nixon’s recession and Ford’s. The economy was still flat. The stock market was falling. It looked like a bad time to start a business. It was a great time to start.

November 23, 2002

Gary North is the author of Mises on Money. Visit http://www.freebooks.com. For a free subscription to Gary North’s twice-weekly economics newsletter, click here.

Copyright © 2002 LewRockwell.com

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