Merchants, particularly small business owners, want to know: what will a recession mean for my business?
There’s no doubt about it—the economy is very volatile at the moment. We’re feeling the effects of this through high inflation.
The rise has been in large part driven by pent-up consumer demand after the pandemic and supply chain issues caused by China’s lockdowns and the Russian invasion of Ukraine.
“These events have caused global inflation rates to spike,” Marsello CEO Brent Spicer explains. “Central banks worldwide have a singular objective at the moment: to control and limit inflation. This reduces market liquidity. As interest rates rise, the cost of borrowing goes up. Before, capital was effectively free. Now, it is very expensive.”
Spicer believes the global economy will continue to slow, but the question is—how much and for how long?
This slowdown is only just starting to cut through to the general economy and consumers. As we are all aware, this will have a big impact on consumer spending and, in turn, retail and hospitality businesses.
Adding to this, low unemployment is making it really difficult for these businesses to attract staff. “We’re seeing signs of this already,” says Spicer. “Hospitality businesses and retailers offering well above minimum wage, but still struggling to get job applicants. The problem we’re seeing is not the pay, it’s a labor shortage.”
All this means small businesses are in for some challenging times.
Put simply, brick-and-mortar businesses have been through a lot in the past few years. Lockdowns and staff illness have forced shop closures and put pressure on margins.
To make it through, businesses had to adapt, pivot, and try new sales and marketing tactics—fast.
We saw so many different innovative approaches come out of the pandemic.
Hospitality businesses took the opportunity to expand to e-commerce, subscriptions, and home deliveries. Retailers pivoted to create new products (such as masks!), run virtual product demos, and set up processes for contactless pick-up and delivery. Others focused on buckling down and building their brand’s community, looking ahead at the long-term game.
We’ve learned a few things from past recessions too. We know for certain that there will be business who come through stronger than ever.
So what will it be that sets them apart from the rest? How will they not just survive, but thrive?
Independent retailers and hospitality businesses taking advantage of technology will be the ones who thrive.
Back in 2008, the Global Financial Crisis accelerated the growth of e-commerce. As e-commerce platforms became more accessible, smaller businesses were able to leverage online ordering—rather than needing huge budgets to build custom websites.
E-commerce gave consumers a way to find better deals further from home, and have them delivered within a few days. So it was the perfect storm for e-commerce, and those consumer habits just took off.
“The Global Financial Crisis hugely impacted the mindset of consumers,” says Spicer.
“Consumers were extremely price-sensitive, substituting premium goods for cheaper-name brands. Luxury goods were out of the question for the average household. Shoppers wanted value, and they started shifting online to find the best prices available.”
From the GFC, a whole new breed of small business was born: small business that was tech-forward, even tech-led. This quickly became the norm—Shopify (e-commerce), Lightspeed Retail (point-of-sale), and Xero (accounting software) were among some of the tech companies that helped these businesses thrive.
And those who saw the opportunity in software for small business and leaped on it were in a better position to recover and grow as consumer confidence improved.
Looking ahead, we predict a massive opportunity for businesses to lean on AI and algorithmic learning. For example, algorithimically-determined product recommendations make up around 35% of Amazon’s total revenue.
Even the simplest AI tactics can be very effective at generating revenue. In Marsello, we have a template product recommendation block merchants can drop into email campaigns and automations. If you’re paying to send emails, text messages or ads, you want to be delivering the most targeted, personalized content to make every dollar count.
We’re also seeing massive opportunities for businesses to get a full overview of their data. That means streamlined, consolidated tech stacks, that house data in one, central place. This reduces the risk of creating “data silos”. A data silo is created every time you introduce a new tool that takes time and resource to export data and re-upload it somewhere else. For example, if you have to manually export your sales data and upload it to your email.
Most companies cut costs during a recession and marketing is usually the first chop. But now is not the time to ditch the marketing efforts.
According to Harvard Business Review, businesses who spent more on marketing actually did better through the GFC.
It makes sense—if you can maintain your marketing budget (or even increase it) while others are cutting back, your comparative marketing impact will increase by default.
However, your marketing does need to get smarter.
There’s a term that merchants, entrepreneurs, and business owners need to get familiar with: capital efficiency. That is, any activity you’re putting dollars into needs to generate a return on investment.
Measuring your activity is extremely important—it will help you reallocate budget to get the best results from your dollar. If you can’t measure the direct impact of marketing on sales, you risk cutting marketing spend on channels or tactics that are actually delivering return.
The problem is that revenue generated from marketing is notoriously difficult to track and measure. Merchants often have to rely on vanity metrics to prove their marketing works—metrics like the number of Instagram followers, email open rates, or Facebook engagement.
Smart marketing, on the other hand, is directly attributable to sales. It means your marketing tools and sales platforms (point-of-sale and e-commerce) are all sharing data with one another.
It also means collecting details from every person who makes a purchase, so those sales and marketing data points can be connected to a customer profile. At every opportunity, you should be adding customers to your database.
“This was proven to be particularly important through COVID. Our top-performing retailers through the height of the pandemic were those that had the biggest databases that they could re-market to, especially when stores were closed consumers could only buy online,” says Spicer.
Independent businesses who prioritize customer relationships will fare better through a recession, and will see much faster recovery down the line.
Brands competing on price to survive a recession will lock themselves into a dangerous loop.
First, they’ll struggle with tight margins as they cut prices to be competitive with retail giants. Second, they will attract customers who make purchasing decisions solely on low prices—these customers will not be interested in building a loyal, long-lasting relationship with them. This will make post-downturn recovery hard too (price-sensitive consumers are fickle and will happily shop elsewhere, rather than sticking around to help small businesses grow).
“Businesses who are able to maintain and nurture their customer relationships through a recession generally have less debt going into the downturn,” explains Spicer. “Merchants who are highly indebted will be hit too hard with interest rates and will have to make concessions in customer experience—simply because they need to cut costs.”
But those merchants who can strike a balance between strategic investment and servicing their debt will see faster recovery as the economic conditions settle.
Here are a few ways you can invest in your customer relationships: