How Recessions Affect Businesses

Talk of an impending recession can send both business leaders and individuals into fight-or-flight mode as they look for effective ways to reduce spendings and boost savings. While the effects of a recession on business can be significant, organizations that build a proactive plan to adapt their business strategy can be better positioned to successfully weather economic downturns.

An economic recession impacts each company differently, but most organizations—no matter the industry or business size—face many of the same challenges.  

Common effects of a recession on business:

• Reduced cash flow
• Decreased or no demand
• Operational changes
• Staffing reductions
• Price wars

Reduced cash flow

Both businesses and individuals reduce spending and face challenges with making timely payments during a recession. Recent research from Deloitte found that 32% of Americans are concerned with making upcoming payments. Additionally, banks, financial institutions, and investors also tend to cut back on loans during an economic downturn, with data from the Consumer Financial Protection Bureau showing that small business lending decreased by 32% during the Great Recession. Combined, such factors can lead to a significant decline in cash flow.

Some steps you can take to improve cash flow during a recession include:

• Automating customer invoicing
• Buying less inventory if your business sells physical products
• Eliminating waste in your procedures and working toward leaner processes
• Renegotiating agreements and payment terms with vendors and suppliers
• Optimizing operational spending
• Identifying additional income streams

Related: 10 Simple Strategies for Cutting Business Costs

Decreased or no demand

In the event of a recession, business priorities and budgets shift significantly. While some products and services are always in demand, organizations and individuals need to make difficult decisions about which expenses to cut. Depending on your offerings, customer base, and industry, this can mean decreased or no demand for your products and services.

As consumers cut their discretionary spending during a recession, some industries are more vulnerable to decreased demand than others. According to data from the U.S. Bureau of Labor Statistics, the industries most impacted by the Great Recession included construction, manufacturing, professional and business services, and retail trade. Additionally, CNBC recently highlighted the industries likely to be the most at risk during the next economic downturn, which include real estate, construction, manufacturing, retail, and leisure and hospitality.

One way for your business to address your market's changing priorities is to diversify your products or services. While you likely don’t want to venture into the unknown, you can consider shifting your current offerings or introducing new ones that still relate to your area of expertise and are more relevant to the current market.

Marketing automation platform Mailchimp is one example of a business that successfully pivoted during a recession. Prior to the Great Recession, Mailchimp primarily targeted large corporations on an annual retainer basis. When many organizations decreased marketing budgets during the downturn, Mailchimp launched a “Forever Free” offering, enabling customers to send up to 3,000 emails a month to a maximum of 500 subscribers.

A goal of this approach was for more businesses to discover the benefits of Mailchimp, and ultimately transition into paying customers to access premium features and send a higher volume of emails. This shift was a success, with Mailchimp growing its user base from 85,000 in September of 2009 to 450,000 in September 2010.

Related: 7 Business Scaling Strategies for Growing Your Business

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Operational changes

A global survey of CEOs by KPMG found that while 86% of CEOs believe a recession will hit in the next 12 months, 76% already have plans in place to address recession-related challenges if and when the time comes. The top steps CEOs plan to take include boosting productivity, managing costs, and reconsidering digital transformation strategies.

Consider asking the following questions when determining operational changes that will help your business weather a recession:

• How will one-, three-, and five-year revenue and growth projections change in the event of a recession?
• How many months worth of savings and cash reserves does the business have?
• In which areas of the business can expenses be consolidated or streamlined?
• Can certain tasks or processes within the business be automated to reduce costs and save time?
• How can the business embrace technology to drive efficiencies?
• Which roles and skills are critical to helping the business get through a recession?
• How can the company help workers learn new skills to meet evolving business needs?
• Can the company leverage independent talent to fill skills gaps in a cost-effective way?

Related: 4 Ways To Prepare Your Business for a Recession, Survival, and Growth

Staffing reductions

During a recession, as demand decreases or expenses need to be cut, many organizations have to make the difficult decision to reduce total worker headcount. Data from the U.S. Bureau of Labor Statistics shows that unemployment jumped from 5 to 10% and total employment dropped by 6% in the U.S. during the Great Recession. Additionally, given talk of a possible recession, a recent survey from Insight Global found that nearly 80% of American workers are worried about their job security if a recession strikes.

According to research from the Human Capital Management Institute, the average total cost of workforce, meaning all compensation, benefits, and HR operations, is nearly 70% of an organization’s operating expenses. Because of this, optimizing worker-related costs during a recession is critical. The decision to reduce staff is never easy. People-centric businesses often implement other strategies to decrease workforce-related costs and retain valued team members as long as possible in challenging financial times.

One strategy might be to offer resources for workers to learn new skills or adapt existing skills. This could help them transition to roles that are more in-demand at the company during a recession. A recent global survey from The Conference Board found that 44% of CEOs plan to invest in upskilling and reskilling existing talent to support long-term growth in a volatile environment.

As an example, if an organization is in a hiring freeze, recruiting team members can tap into transferable skills such as empathy, communication, and problem solving to succeed in a customer service or support role. This approach is a win-win because it enables workers to stay with the company and can help support an improved customer experience and client retention.

Other steps organizations may take before reducing total headcount can include:

• Implementing a hiring freeze
• Filling skill gaps with independent talent
• Pushing back pay raises and promotions
• Pausing worker perks like free lunches and team outings
• Adjusting executive compensation
• Minimizing overtime
• Implementing furloughs
• Offering voluntary unpaid time off
• Creating voluntary exit packages such as early retirement

Related: The Cost of Hiring an Employee: Explanation and Examples

Price wars

When speculation of an economic downturn hits, some companies jump start price wars with their competitors, slashing prices to gain new business as customers tighten their budgets. However, price slashing can hurt an organization’s long-term brand and profitability much more than the near-term benefits you might see with increased volume of sales during a recession.

Price wars decrease overall profit margins and have the potential to turn away existing customers who might think decreased prices means your products or services won’t offer as many benefits. Engaging in a price war can also present challenges when the economy improves and it comes time to increase your prices, as customers might not be willing to return to paying higher prices.

Instead of getting into a price war with competitors, here are some strategies your business can consider to attract new business and retain customers:

• Reinforcing the value and worth of your offerings. As current and prospective customers reduce spending going into a recession, proving the measurable business benefits of your products or services is key. In marketing materials, on your website, and during sales conversations, share success metrics such as the ROI you’ve helped customers generate. If possible, also consider developing case studies that highlight how your business has helped customers—especially if your offerings helped reduce or optimize costs.
• Renegotiating with loyal customers. Because it can be challenging to gain new business during an economic downturn, retaining current customers will be more important than ever. If you face the risk of losing customers during a recession, identify ways to negotiate with customers to help them weather the recession. Some examples include changing payment terms from annual to quarterly, offering a free month with a contract extension, adding on a free incremental product or service, or granting a discount for early invoice payment.
• Offering free trials. Allowing customers to test out your products or services can help you reach more potential customers who might be hesitant to jump right into a lengthy contract or retainer. Once customers recognize the benefits of what your business has to offer through a free trial, they will be more likely to come on as a paid customer—and potentially even refer other new business.
• Creating different pricing tiers. Rather than discounting your high-value products and services, which can have a negative impact on long-term profitability, another option is developing pricing tiers that are more affordable. Mailchimp’s approach to offering a “Forever Free” option in addition to paid subscriptions is a prime example of this approach. Once customers start using your products or services, they might be eager to access additional features available through a higher pricing tier.

Related: How To Prepare for a Recession

Mitigate the effects of recession with help from Upwork’s Talent Marketplace

Economic recessions are daunting for both individuals and businesses. By understanding the potential impacts a recession can have on your business and identifying ways to address key challenges, your organization can be better prepared if and when a recession strikes.

If you’re a business leader looking to optimize spending while ensuring you have talent with the skills you need on your team to weather a recession, Upwork can help. Through the Upwork Talent Marketplace™, businesses can access diverse, independent professionals with more than 10,000 skills to fill any skill gaps while reducing operational costs. And independent talent can search for and complete jobs with leading organizations that match their skills and experience.

Learn more—start searching for talent that align with your needs today.  

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