How To Make Money In A Recession: 5 Steps To Create Demand For Your Product, Service, Or Platform
Recessions are the worst time to fight for demand. And recessions are a great time to create demand.
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Dear Friend, Subscriber, and Category Pirate,
We are in a recession.
(Not officially, but it is not looking good.)
Stocks are down. Startup valuations have plummeted. Bitcoin and Ethereum have lost more than 50% of their total value since their respective highs back in November, 2021. And sentiment around Silicon Valley is that the next 12-18 months are going to be challenging for companies looking to raise money.
But where there is chaos, there is opportunity.
Approximately 10% of companies get stronger in downturns. And you can’t be in the 10% unless you do some serious thinking.
Through the category lens, downturns are simple to understand—and have a clear path to navigate. When times get tough, businesses, governments, households, and individuals all do the same thing: they create two lists.
“Must Haves”
“Nice To Haves”
Then they start cutting the “Nice To Haves” to lower costs—as a direct response to their revenue / income / buying power shrinking.
Which means the seminal question is: what makes people put some categories/brands/products on the “Must Have” list versus the “Nice To Have” list?
Perceived value.
(Everything we value, we’ve been taught to value.)
The difference between a dumb idea and a great one, or the difference between useful products and useless ones is the perception we have based on what we have been taught. (Don’t forget: pet rocks used to be in demand.)
The trick is to get your product/service/platform on the “Must Have” list, and to be as high up on the list as possible. Because the higher the category is on the hierarchy of perceived value in the consumer’s mind, the greater the likelihood they will keep buying from you.
Which is why savvy leaders market the category in downturns.
Because people make their lists by category first, and brand second.
(“Alright Tom, we are paying for 3 different streaming (category) services right now. Which one (brand) don’t we need?”)
Elon Musk was a guest on the All In podcast and summarized the net-positive effects of recessions well:
“Recessions are not necessarily a bad thing. I’ve been through a few of them. What tends to happen, if you have a boom that goes on for too long, you get misallocation of capital. It starts raining money on fools, basically. Any dumb thing gets money. At some point, it gets out of control… and the bullshit companies go bankrupt and the ones that are building useful products are prosperous.”
When most people hear the word “recession,” they imagine the housing crisis of 2008 or the dot-com bubble in the late 90s—and all of the businesses that went under as a result.
But what doesn’t get talked about enough are the incredible companies that emerged out of these challenging times as well. Google and Amazon both came out of the dot-com bubble in the 90s (as did hundreds of other world-changing companies). And Uber, Spotify, Airbnb, Square, and dozens of other next-gen technology companies were founded between 2006 and 2009, right in the middle of the greatest financial crisis to ever threaten America.
Recessions are pressure-cookers that rid the system of businesses failing to live up to the value they are promising society.
Here’s how it happens:
The Company Downturn Cycle Of Doom
Step 1: Recession hits.
Stocks crash. Capital dries up. Investors stop playing as many hands and start sitting out of deals. Consumers tighten their belts and begin to examine their spending habits. The music comes to a halt and everyone in the room stops dancing.
Step 2: Demand falls.
The result of all this “tightening” is that consumers spend less. Suddenly, that vacation you were planning (and that Airbnb you were looking at) goes from a “need” to a “want.” And not just a “want,” but a “want” you have to work harder and harder to rationalize to yourself. Companies (like Airbnb, for example), immediately feel this change in temperature. Bookings go down. Revenues fall. Inventory builds up at large retailers like Target and Walmart (43% and 32% year over year respectively) that has historically led to both big chains missing revenue expectations. Not by a lot—just enough to make everyone pause.
Step 3: Companies start playing “The Better Game”—hard.
Demand has started falling, which means companies that have employees to pay and investors to keep happy need to work twice as hard to earn the same amount of money they did a few months prior. Their entire strategy becomes to “catch” demand. As a result, they fall into The Better Trap, which is often “my deal and discount is better than everyone else’s.” These companies believe there is a fixed number of people willing to spend money in this current environment, and they become myopic about convincing those select few customers to shop with them (opposed to one of their competitors—who are furiously doing the exact same thing).
Step 4: Customer acquisition cost goes up.
Before the recession, customer acquisition costs were $X. Now, they are 2x, or 3x, or 5x times higher. For every dollar you used to spend acquiring a new customer, you now have to spend two. This chops your profit margins down a size, which accelerates the existential threat to your company.
Some tech startups burn half of their venture investors' money on demand capture with Google and Facebook. And executives who have already dug themselves a deep competition hole drive CAC through the roof as they try desperately to catch the falling demand knife in downturns.
Step 5: Cash flow goes in the wrong direction.
Lowered revenue and profit margins lead to lower cash flow.
Which means now you’re spending more to make less cash.
But it’s not just you. It’s you, plus all your competitors, plus all the other tangentially related companies in your industry, plus all the other companies that have cash flow going in the wrong direction. As a result, cost of capital increases as valuations/market caps go down, while debt and credit financing go up with interest rates.
Until eventually, your company runs out of money.
Recessions are the worst time to fight for demand. And recessions are a great time to create demand.
The truth is, you never want to be in a position where you have to “fight” for demand. (We call this The Better Trap.)
But in a tightened environment, fighting for demand is the equivalent of trying to run a marathon while simultaneously holding your breath. Running is taxing. And depriving yourself of what you need to breathe is also taxing. Both at the same time is the worst idea you could have.
Instead, especially in a recession, the people who know how to create demand become most in demand.
They create what is suddenly urgent, important, and most useful in the world.
They remove themselves from “comparison” conversations and educate customers on “different” problems, solutions, and outcomes (that they likely haven’t considered before).
They allow “competitive” companies to waste their resources fighting against each other, and leverage this unique period of time to create net-new opportunities for themselves and the customers they want to serve.
They force a choice, not a comparison.
They elevate the value of what they do (at the level category level, not the product/service level).
Here’s how: