Four Mistakes Entrepreneurs Make in a Recession
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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About the Author: Scott Shane is A. Malachi Mixon III, Professor of Entrepreneurial Studies at Case Western Reserve University. He is the author of seven books, the latest of which is Illusions of Entrepreneurship: The Costly Myths that Entrepreneurs, Investors, and Policy Makers Live By. He is also a member of the Northcoast Angel Fund in the Cleveland area and is always interested in hearing about great start-ups. Take the entrepreneurship quiz.
March 10th, 2008 at 9:03 am
Four Mistakes Entrepreneurs Make in a Recession » Small Business Trends…
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….
March 10th, 2008 at 10:22 am
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
March 10th, 2008 at 11:58 am
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.
March 10th, 2008 at 11:59 am
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.
March 10th, 2008 at 12:48 pm
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.
March 10th, 2008 at 6:19 pm
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
March 11th, 2008 at 9:07 am
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?
March 11th, 2008 at 11:17 am
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..
March 11th, 2008 at 11:56 am
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
March 11th, 2008 at 11:57 am
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!
March 11th, 2008 at 12:08 pm
Susan,
Good additional points. I myself know how valuable those repeat customers can be, especially during slow times.
March 11th, 2008 at 7:08 pm
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March 11th, 2008 at 8:26 pm
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.
March 12th, 2008 at 2:27 pm
This is a really interesting and useful post. In particular point 4, I think.
March 12th, 2008 at 3:58 pm
Interesting post! Things will get tough at some point (recession?) so these points will come handy.Thanks for sharing!
March 12th, 2008 at 11:08 pm
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
March 12th, 2008 at 11:09 pm
(PS - by “website” I mean if you click my name.)
March 14th, 2008 at 7:59 am
[…] Small Business Trends identifies four specific areas that entrepreneurs should concentrate on when it comes to making business decisions during a recession. One of the four particularly caught my attention, as it is a primary area that I’ve been “thinkin’ on” as more and more experts back themselves into agreeing that it is possible a recession is maybe in the offing. 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. […]
March 14th, 2008 at 8:20 am
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
March 18th, 2008 at 12:34 pm
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.
March 23rd, 2008 at 8:01 pm
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.
March 27th, 2008 at 4:57 pm
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.
March 27th, 2008 at 5:05 pm
[…] to bounce back once things get rolling again. Take a minute to review Scott Shane’s post about Four Mistakes Entrepreneurs Make in a Recession. It’s good food for economically-weary […]
April 15th, 2008 at 10:31 am
8 Mistakes Start-ups Make…
As the global economy expands, there is reason to believe that small businesses may have some competitive advantage. That is, if entrepreneurs don’t fall prey to these common startup pitfalls…….
May 13th, 2008 at 4:33 am
Insightful article, I very much enjoyed reading. Keep up the good work/
June 3rd, 2008 at 7:46 pm
I agree on the more competition.
You just have to work harder in this economy.
June 14th, 2008 at 5:28 am
Scott,
This is a fine post - my fave is your #4 - That’s where the opportunity in recession lies.
Cheers!
June 19th, 2008 at 8:31 am
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