How To Survive A Recession

The things that get marketers promoted in a bull market are the same things that get them laid off in a recession.

This content first appeared in the No Best Practices newsletter on 07.17.2022.

The word “recession” has been popping up in the news and on Twitter timelines. Some publicly traded retailers are cutting their sales forecasts for the second half of the year. And it’s hard to deny that the prices of basic necessities like gas and groceries are going up.

So what does that mean for your brand? The US hasn’t been through a major recession since 2008, nearly 15 years ago. And where was eCommerce in 2008? Amazon had been in business for 15 years at that point, and Net-A-Porter had been online for eight. The iPhone had been around for about a year. Facebook was still restricted to college students, and Instagram didn’t exist.

This is going to be the first “DTC recession”. There is no industry-specific playbook on how to survive a recession. But there are two critical mindset shifts you’ll need to make if you want to maintain cash flow and come out the other side in one piece.

What Happens During A Recession

A recession is a sustained period of economic decline–GDP is negative, unemployment rates rise, and retail sales fall. None of those things are currently happening at scale. So we’re not in a recession…yet.

What is happening? Inflation. Supply chain disruptions and other factors are causing prices of raw materials and consumer goods to rise. Prolonged inflation can have some of the same outcomes as a recession.

In both scenarios consumers have less money to spend. That makes your customer acquisition costs increase. Rising prices and lower employment levels knock consumers out of your total addressable market. Your dollars are working harder to seek out a smaller number of available buyers. If you like my dartboard analogy, there are fewer dots on the board, and they’re more spread out.

It’s often helpful to zoom into an individual consumer’s behavior. Your customers and your prospects each have recurring expenses–the bills they need to cover each month. These include long-term contracts like rent or a mortgage payment, and essential spending on things like food and medical care.

In a recession, your customers may lose their jobs or become very nervous about the potential of losing their jobs. That takes a lot of the fun out of “fun” purchases like a new handbag or luxury olive oil. Everyone becomes less likely to make impulse purchases or try out new brands. Private Label or “Certified Pre-Owned” suddenly looks a lot more attractive than Name Brand and Brand New.

Of course, not everyone can go “monk mode” and live a joyless life of lentils, cricket protein and moldy books you found on a stoop. Everyone finds ways to treat themselves, even when there is less disposable income to go around.

The Two Mindset Shifts That Will Help You Survive A Recession

The “DTC era” of retail has primarily focused on one priority: make topline revenues go up. Big revenue growth was supposed to lead to big exits (that didn’t really pan out). Big revenue growth got founders press coverage and allowed them to go where the real money was…angel investing and becoming a SaaS influencer.

But in many of those scenarios, the revenue growth was not profitable. The companies were losing money. In a recession, institutional capital has less tolerance for money-losing companies. And if you’re balancing on the razor’s edge of profitability, rising CAC has a high likelihood of toppling you over.

Here are the two mindset shifts you’ll need to make to become a profitable marketer:

Mindset Shift #1: There Are Three Kinds Of Revenue

1. Good revenue: dollars hit the bottom line within 90 days of the first transaction
2. Mediocre revenue: dollars hit the bottom line within a year of the customer’s first transaction
3. Bad revenue: the customer is never profitable, or it takes more than a year

Chasing bad revenue is like eating porridge cut with sawdust. It will fill you up on the front end but wreck you on the back end.

There are a lot of channels and tactics that we pursue simply to “comp” last year’s number or otherwise pad out the topline. Paying to publicize deep clearance sales is one example. Running unprofitable acquisition campaigns with the intention/hope of breaking even within a year is another.

Mindset Shift #2: Incrementality Matters

I talk a lot about incrementality in this newsletter. If you’re a first-time reader, the purpose of marketing (in my opinion) is to create demand and conversions that wouldn’t have occurred in absence of marketing–and do it profitably. That’s incremental demand.

Unfortunately, a lot of what we obsess over in digital marketing land does almost nothing to drive incremental demand. Instead, we insert additional touchpoints as close to the bottom of the funnel as possible, and then use biased attribution to make those touchpoints appear successful in isolation.

If a campaign or tactic is showing $100K of attributed demand in-platform, but your total sales for the period increased by $5K, that tactic is not driving much incremental demand. Marketers working to improve channel performance in isolation are the band on the Titanic, competing on musical proficiency while the ship slides into the ocean.

TL;DR: Comping bad revenue and using misleading reporting frameworks slowly bleeds your business dry. But many orgs incentivize this behavior with short-sighted incentives or weak cultures.

Putting The Mindset Shifts Into Action

Some of these tactics may make your revenues go down, but only your bad revenues. Or they may make channel performance go down, but minimally impact overall revenues.

Rethink Your Reporting & Incentives

There’s a reason that so many marketers will take any revenue that they can get: in many organizations, marketing gets no visibility into the deeper financial performance of the business. The marketing team is given a sales target and a budget and told to “make it work”.

Then a recession or another adverse event comes around and “make it work” doesn’t work anymore. No one can figure out why, and marketers lose their jobs. That is a poor outcome for everyone involved.

You won’t be able to put these two mindset shifts into action without the right incentives. If marketers are rewarded for generating the biggest numbers with the lowest effort, you’ll get a bunch of hacky channel optimization that doesn’t make sales go up. If marketers are told to scale at any cost, you’ll shoot to the moon unprofitably.

If you are in the position to control how your marketing team is incentivized, take a second look and determine how well your current goals are serving the overall goal of cash flow. If you’re not in the position to determine incentives, try to raise these conversations internally. A crisis is actually one of the best opportunities to get people to change their thinking.

Audit & Optimize “Blended” Channels

These are channels like Branded SEM and Affiliate that are a mixture of toll-taking and true incremental demand generation.

If someone is searching your brand name, they have high purchase intent. Do everything you can to get wholesale partners and competitors out of your branded search results (i.e. IRL negotiation). Then use tactics like dayparting to reduce spend during low-converting times and against high-intent audiences. Or test turning off branded search entirely.

Affiliate is similar: you’re often paying fat commissions to deal sites (coughHoneycough) to bring in low-quality customers. It pads out the topline, but many of these customers barely break even. Remove yourself from these sites or install software to block them. And structure your commissions to reward new customers who purchase at full price.

Stop Spending Big Money On Loyal Customers

If a customer has made more than four purchases with you, they are loyal. You don’t need to spend money marketing to them. If they wind up in a mid-funnel Facebook campaign, fine. If you have something very special to say and want to send a postcard, fine (but holdout test it!). But don’t put these audiences into your retargeting campaigns or send them special offers.

Paying vendors to stick hyper-targeted gobbledygook in front of these customers also counts as “spending money to market to loyal customers”.

Keeping your core customers happy is important. That often means simply not screwing things up. This is a great time to audit your CX processes and build in a “fast lane” for high value customers. Eli’s newsletter is one of the best CX resources you can find.

Align Expenses & Impact

The lead-up to a recession is a great time to audit your business for activities that require overhead that is not proportional to their bottom-line benefit.

Paid social creative is a great example. You probably develop and test multiple formats, from scripted “UGC” to b-roll to highly produced video shoots. Look for patterns–which format consistently performs best? Does your time and money investment align with that? If not, cut the “losing” formats entirely, or limit it to a few tests per year.

eCom imagery is another example. In an ideal world, those images would serve multiple purposes. I know too many brands that have hyper-specific eCom photo requirements to cater to their “digital flagship vision”. And then those images can’t easily be used in email, paid social, or anywhere else.

Optimize Ads Up & Down The P&L

Your ad creative isn’t the only venue for improving the efficiency of your paid spend. I wrote about all your options in this post.