Will You Dive or Thrive in an Economic Slowdown?

Rising markets make everyone seem like a genius.

By Charles Kile

The saying about rising markets and geniuses comes from the stock trading world. When asset prices keep rising, everyone who holds those assets looks and feels like they’re really smart. We’ve had a lot of “really smart” people trading stocks and cryptos over the last couple years.

Anyone who has been around the block, though, knows trends change quickly and even the smartest people can find themselves without two nickels to rub together if they don’t watch out.

I see this same mentality among business owners. When times are good, they can do no wrong. When times get tough, everyone is feeling the pinch and most seem to be caught off guard.

In this article, I aim to share some ideas that might help you spot some things you can do differently now to make sure your business thrives during not only the good times but also the bad.

Understand Your Numbers

When you don’t overtly invest in marketing, it can be difficult to track the return on your investment. That doesn’t mean no investment is being made. To me, marketing is any action that will bring in new customers. It can mean sending out flyers, having a website, or just doing a great job so people refer you to their friends.

The great thing about word-of-mouth marketing is that it’s free, at least in terms of money. The bad thing about it is that it’s not under your control. When it works, it’s great. When it doesn’t work, well, it doesn’t work! And there’s not much you can do about it.

Advertising is a form of marketing that allows you to essentially buy customers. Any business wishing to buy customers can do so in many ways. I would also argue the most important part of advertising, besides getting customers of course, is tracking the numbers.

Now I want to share a hypothetical example of a business owner named Todd. My aim is to illustrate what advertising looks like from a numbers perspective to simplify this thing called marketing and help you see how it might work for you.

Todd: A Man Good with Numbers

When measuring marketing, or advertising, the name of the game is knowing how much money you need to spend to get one customer. You should already be able to look back and figure out what the average income is from one customer based on the last 100 or even 1000 customers. If you haven’t kept track, now is the best time to start.

Take this example of Todd’s business. Todd gets an average of two customers per month from word of mouth. Sometimes it’s three, other times it’s one, so the average is two. These customers don’t cost Todd anything to acquire; all he needs to do is pick up the phone when they call.

Todd’s average profit from one customer is $3000, so he makes about $6000 per month from his word-of-mouth clients. He has the capacity to do four projects per month, however, so he has room for two more. If he could fill this capacity, he could be making $12,000 per month in profits, so he decides to advertise to fill his capacity.

This Much In, That Much Out

Todd spends $2000 on advertising in one month. He’s been doing this for a while now and he knows that, on average, it costs him $1000 to acquire one customer. Spending $2000 gets him two new customers and allows him to reach his monthly capacity. These two customers bring in an additional $6000 to his income.

Here’s the math:
$6000 from word-of-mouth customers × 2
$6000 from advertising customers × 2
–$2000 for advertising costs
_____________________________

$10,000 income after paying for advertising

Todd’s Plan for Tough Times

As you can see, Todd has figured out how to spend $2000 on the front end of his business and get an additional $4000 out the back end after paying his advertising costs. This is a simple example of how marketing and advertising works. Your numbers will obviously be different and figuring out exactly what they are can be challenging, but it’s well worth the effort.

As for Todd, he has operated his business through recessions before. He knows when times get tough, people tend to contract their spending. Businesses will often try to cut their costs as much as possible. Many will cut advertising costs.

Todd’s plan is different. He knows advertising is the fuel driving his business forward and his numbers are good enough that there’s room to be flexible. Even if his cost to acquire one customer goes up 50% to $1500, he’ll still profit $1500. He can afford to spend more than most of his competitors who don’t fully understand their numbers and most of who do not even advertise. When nobody else advertises, Todd will be the only one.

When Everyone Else Fires, Todd Hires

Another thing that happens when the economy slows down is that people lose their jobs. Companies go under or cannot afford to pay their employees anymore. The labor market becomes abundant with skilled workers desperate to work.

Todd has seen this happen before and is planning for it. If he can finally hire some additional good workers, he can increase his advertising budget and acquire more customers. Since a lot of his competitors will be slowing down and laying off workers, he’ll do the opposite. He’ll move to expand and grow.

Business will certainly become more difficult and probably less profitable, but Todd is in this for the long haul. Eventually, this economy will change trends again and come back stronger than ever. Todd’s business will come out on top when the recession ends—and the core of his strategy was knowing his numbers.

The Big Ones Eat the Little Ones

One way to expand is to acquire more customers and pair them up with workers to complete their jobs. Another way is to acquire other businesses. When companies go out of business involuntarily, it can be devastating for everyone involved. Customers go without the help they need. Employees go without work. And the business owners often are left with nothing. It’s a lose-lose-lose situation.

On the flip side, if there is a company ready to buy out the weaker one, it can quickly become a win-win-win situation. The customers get taken care of. The workers get to keep working. And the former business owners get to exit the equation with something to show for their years of effort and sacrifice.

Perhaps acquiring another business sounds like a distant pipe dream to you now, but things change when economies change. Being ready financially and from a business standpoint can turn a market meltdown into a market full of opportunities. After all, people are not going to stop needing water, right?

Where to Start

To someone who has never paid attention to this stuff, it can seem daunting to start now. Hopefully you’ve kept really good records and can spend some time going back and looking through the past performance of your business.

Finding out certain metrics can help make things really simple:

  • The average value per customer (including repeat business)
  • Your marketing cost per customer (total marketing spend/number of clients)
  • Your average costs of goods sold per job
  • Where each customer comes from (advertising, word of mouth, phone).

These numbers won’t mean a lot on an individual basis because each customer and each job are different, but in the grand scheme of things, these numbers are invaluable. They help you see your business from a high-level perspective, which is what’s required when navigating a multi-year recession.

These numbers are important for other reasons too. My previous article in Water Well Journal (“Succession Plans and Websites,” October 2021) was about succession planning. When you understand your numbers and can convey this information to potential buyers of your business, the business becomes a lot more valuable, and it becomes possible for others to see how they might take it over.

Not knowing your numbers means you’re flying by the seat of your pants. To some this is the only way to fly. But for those looking to thrive and grow during tough economic times, knowing your numbers will help you sleep better at night, unless the numbers themselves keep you up! However, at least you’ll know them and can take action to improve them.

The Reality of the Situation

The thing about knowing your numbers and understanding how to drive a business forward with advertising is that it’s critical to do in good times as well as bad. There’s no reason to wait until times get tough to start paying closer attention to the numbers. The business leaders that do this stuff now are already crushing their competition and they will continue to do so when times turn tough.

Back in my construction days, I didn’t even know this concept existed. If someone had asked me about my numbers, I wouldn’t have been sure what to say. It took me a long time with a lot of trial and error to finally see how important this stuff is. Had I known this earlier, my business would likely be much more successful. I hope this article helps you be more successful.

What Do You Think?
I would love to know what you think. Do you agree? Disagree? Think I missed something? Please reach out to me. I believe we’re all better off sharing information and working together as a community. Email me at chuck@groundwatermarketing.com.

Charles (Chuck) Kile is the founder and director of Groundwater Digital, a marketing agency dedicated to helping groundwater businesses establish themselves online. He is commonly seen speaking at conferences and teaching continuing education classes virtually and in person. He can be reached at chuck@groundwatermarketing.com.