Writing Flexibility Into Your Business Model Can Save Your Company
Free Book Preview: Unstoppable
This year marks the tenth anniversary of the start of the U.S. economy's Great Recession, aptly given the moniker as the worst financial crisis since the Great Depression. Claiming over 170,000 small businesses between 2008 and 2010, the Great Recession affected entrepreneurship, micro-economies and job creation in a way we haven't seen since the 1930s.
As a young entrepreneur, launching a fashion retailer brand and watching the business evolve was thrilling. But in 2008, the financial crisis came barreling through the U.S. economy like a runaway train. Foot traffic in our flagship store plummeted: A lethal combination of economic uncertainty and high price points resulted in the worst bottom line T.C. Elli's has experienced in 18 years of business.
When I began injecting personal funds into the business to keep the doors open, it was clear that my primary focus was no longer centered on my brand thriving, but surviving. In witnessing the brutal impact the recession had on our customer base, restructuring pricing models to accommodate the financial downturn was our only choice. Long gone were the days of luxury denim priced at $300 a pair -- revamping the inventory and pricing models to accommodate the poor economic climate was critical to survival.
Even then, it was a solid two years of recovery efforts from the icy plunge into a negative cash flow; albeit, a rapid rebound compared to most small businesses across the nation.
So, what went wrong for other businesses that are still recovering? Or even worse, for those that didn't survive the financial downturn.
Is there an "it" factor that equips companies to survive financial crises?
It was easy for me to believe that T.C. Elli's ethos, brand loyalty and value proposition interlocked to differentiate the company from its competitors and equip it for survival. However, in reflecting back years later, it's clear to me that those factors, while important, weren't responsible for T.C. Elli's resilience throughout the 2008 financial crisis.
Don't misunderstand me: Those key pillars are essential in providing value and a premium customer experience, but implementing flexibility to meet the needs and limitations of customers during a harsh consumer climate kept the company alive.
When your business model is rooted in offering hedonic goods versus utilitarian goods, flexibility is non-negotiable. Especially during the worst financial crisis since the Great Depression.
Long gone are the days when a growing business with hopes of longevity could etch a business model in stone and trot off into the sunset. Savvy customers and a tight economy require companies to adapt or die; it's the ability to change that separates your brand from the competition in turbulent times. If companies aren't flexible, the competition will be. This flexible business-model evolution is smart business in an economy that's run by dollar and tech-savvy consumers.
So, what does flexibility look like? Here are four tips for incorporating flexibility into your business model:
Run a lean model and know your expenses.
When entrepreneurs run a well-organized, transparent balance sheet, companies reduce the potential for line-item surprises. Small business owners should know their margins like they know the back of their hand; wise business owners know what everything costs. When the financial crisis hit, I stepped in to absorb most of the shifts in our flagship store to keep payroll at a minimum. Reduce external dependency on credit firms by knowing your expenses, trimming excessive line-items and implementing recession-proof expenditures. Today, we run a clean financial house with frequent audits of every single business expense to determine ROI and its importance to our brand.
Diversify your revenue streams.
This is key. As I watched the era of luxury denim drift away, I knew that pivoting the business model to capture additional revenue streams and customer segments were our sole chance at survival. While it would have been easy to dig in my heels (while wearing designer denim), I knew that resistance to change wasn't our solution; it was the enemy of growth. As a result, we revamped our inventory to offer lower price points and capture a customer segment who looked at clothing as a utilitarian good.
What separates brands who survived the financial crisis from those that were swallowed whole by it, is the flexibility in their business models to offer value to multiple demographics and customer segments. "A wide customer base helps reduce business risk during turbulent economic conditions," James Feldstein, president of New York-based Audio Den, told me in an email. "If you prepare your business model for economic volatility by having multiple streams of revenue, you're more likely to weather any financial storm."
Build a recession-proof culture.
In the era of flashy company culture and luxurious employee perks (see: Google's gourmet meals and in-office massages), small businesses are easily seduced into offering extravagant perks that stretch beyond their financial means. While "culture" is a buzzword made trendy by Silicon Valley startups, the true definition refers to "the set of shared attitudes, values, goals and practices that characterizes an institution or organization."
In the name of "culture," many companies overextend their budget, generate high overhead, and then come crashing down when economic uncertainty hits. Instead of writing the Silicon-version of culture into your business plan, emphasize the six components of a healthy culture (hint: they're free). In an economic downturn, you'll be well-equipped to keep the culture alive without breaking the bank, or having to fire your masseuse.
Create a value matrix.
Outside of keeping a flexible inventory, capturing diverse customer segments and modifying price points, creating a value matrix to tie those core puzzle pieces together is where you'll truly bring flexibility into your business plan. Since T.C. Elli's recovery from the financial crisis, I've enjoyed swapping stories with other small businesses who emphasized creativity in their business models and value propositions. As companies who aren't inherently recession-proof (hedonic goods), we share a unique entrepreneurial bond.
Earl Choate, founder and CEO of Concrete Camouflage in Isabella, Mo. shared with me how he led his brand through the recession by expanding his value proposition matrix: "Knowing neither a bull nor a bear will last forever, we instead focused on positioning ourselves for when the economy improved. We added deeper resources, how-to pages and content addressing common and uncommon problems for those in the DIY market on a tight budget." Lest you get nothing else out of this, know that this broadening of value in response to a financial crisis is why brands survive.
Run a lean model. Diversify your revenue streams. Build a recession-proof culture. Create a value matrix. And most importantly, be flexible.