The past two years have been marked by successive crises. Triggered by macro-environmental events such as the global COVID-19 pandemic, these crises have put immense pressure on governments and businesses alike. As inflation continues to soar, consumer confidence is tanking and the global economy is heading for a downturn.
According to Robin Brooks, Chief Economist for the Institute of International Finance, “global recession is coming” with two of Europe’s largest economies, Italy and Germany, experiencing a sharp fall in their Purchasing Managers’ Index (PMI). As such, the recession threat is looming large over the Eurozone, with manufacturing supply currently outstripping demand as a result of inflation surges.
All indications point to continued economic distress, not only for the Eurozone but for the rest of the world as well. In an effort to help businesses prepare for the worst-case scenario, Vendavo recently published Expert Tips for Recession Proofing Your Business, an eBook in which price evangelists, business consultants, sustainability advisors, and other experts weigh in on the impending recession. But before we dive into those actionable insights, a quick look at the increasing frequency of recessions is warranted.
Recessions to become more frequent
Although recessions have been rather frequent around the world, most have been isolated and contained within their respective territories. When it comes to global recessions, however, there have been only four after World War II that impacted the entire world at the same time, with the 2007-2009 Great Recession being considered the worst of all due to the decline in real World GDP per capita and the number of countries affected by it.
Since the 1700s, the United States has experienced as many as 48 recessions, with some more impactful than others, and each having its own unique set of causes, effects, and eventual resolutions. The Eurozone, on the other hand, has experienced only two recessions since its inception in 1999 and before the COVID-19 pandemic: the Great Recession of 2007-2009 and the European Sovereign Debt Crisis of 2011-2013.
Of course, this is not to say that recessions throughout Europe were unheard of before the founding of the Eurozone. In fact, there have been three major recessions over the three decades prior. Although this may not seem too bad, recessions are expected by economists to become more frequent in the Eurozone as average economic growth rates continue to decline.
While global economic slowdown or declining economic output is not as frequent, isolated recessions throughout the world occur every five years or so on average and last for an average of six to 17 months. And although some are deemed quite short, such as the COVID-19 recession that lasted only two-three months by official accounts, its effects are deeply felt even today and worsened by the supply-demand imbalance, inflation, and more. In fact, it took the economy until the summer of 2022 to recover from the 22 million jobs lost during the pandemic, and that is in the United States alone.
And so, considering the frequency of recessions following economic expansion, inflation, declines in consumer confidence, and other causes, it is important for businesses to prepare for such economic states. When it comes to the manufacturing industry in particular, although businesses have been through the trenches in recent years, many have begun to develop sustainable models and build resilience within their operations. The same approach should be extended to their financial risk mitigation and contingency plans in times of economic slowdown.
Experts recommend protecting your financial position
There is no way to predict the future with absolute certainty, thus a recession, although likely, may not occur immediately. This provides industry players with an opportunity to recession-proof their businesses before the next crisis becomes a reality they can no longer avoid.
Vendavo’s eBook offers a series of actionable recommendations for forward-thinking firms to prepare for any economic state. So, without further ado, let’s explore some of the main takeaways that will undoubtedly inspire you to recession-proof your business.
1 – Transform your organization into a holacractic center of resilience, recovery, and renewal
According to Dr. Larisa Kryachkova, Sustainability Advisor, businesses should seek out long-term solutions to better cope with the recession and respond with resilience to any disruptive changes. She recommends mapping out all processes to see which ones drive value, transferring all possible tasks to digital tools and capabilities, and more importantly, developing capabilities and filling capacity gaps to create new revenue opportunities and deliver enhanced outcomes to customers.
2 – Do not panic and do not automatically drop prices
Panicking in the face of recession is a natural response. But Kevin Mitchell, President of Professional Pricing Society, recommends otherwise, urging businesses to concentrate on the value they provide for partners. He also recommends avoiding a price war and working on increasing value for customers rather than automatically dropping prices.
3 – Focus on your long-term strategies rather than short-term ones
Vendavo’s Product Marketing Manager, Aneesa Needel, reminds business leaders that it is part of their mission to constantly renegotiate short-term and long-term strategies and goals. High inflation, increasing interest rates, and continued supply chain issues are not only a pressing reality but also a constant possibility. And so, the expert recommends that organizations manage their “long-term strategies with a balance of a few purposeful short-term directives to get past the coming 6-12 months.”
4 – Consider the perceived value of your products
To endure a recession, businesses must “stay close to any changes in a product’s perceived value and associated market dynamics.” As JT Bowlin, Vendavo’s Consulting Director of Pricing Solutions, explains, being aware of such changes allows businesses to reflect them in their pricing accordingly. Value can change anytime based on the product family, individual product, features, regions, and more. Businesses that already have a pricing strategy for such changes should not panic and execute their strategies as planned.
5 – Look to the aftermarket as a soothing tonic
“Clear evidence from the last downturn shows that while investment in capital equipment will be delayed, your aftermarket businesses present a great opportunity to replace lost sales and maintain key customer relationships”, says Robert Irwin, SVP Global Business Consulting at Vendavo. His strongest recommendation is to focus on the aftermarket using a step-by-step strategy, from gaining control over pricing to raising organization confidence in the decision-making process.
6 – Defend profitability and preserve unit margins
Vendavo’s EMEA Managing Consultant, Yekta Yeganeh, explains that “companies tend to either preserve volumes by discounting prices or increasing prices to offset the cost hike” during times of economic downturn. Her recommendation warns companies not to focus on price increases or decreases but on maintaining current price levels “by removing the non-essential features which defend the profitability by preserving volumes or unit margin.”
Creating value that counts
Experts seem to all agree that a recession is not the right time to panic. Instead, businesses should remain collected and focus on assessing and selling their value at a price that accurately reflects it. Vendavo’s eBook is truly a source of actionable recommendations for manufacturers and aftermarket service providers that want to endure an upcoming recession.
And if you find the few tips curated in this article inspiring, you may be pleased to know that you can access more of them and even discuss them in depth with pricing experts at Copperberg’s Manufacturing Pricing Excellence conference on the 14th of September 2022.
The event is dedicated to helping pricing professionals discover more efficient ways to optimize pricing, deal with market volatility, enhance collaboration with sales, and communicate pricing internally and externally. Experts from Vendavo, including EMEA Services Principal Consultant Lehrasib Ali, will be there to help guide you through your commercial excellence journey.