Why Certain Businesses Are Recession-Proof: What You Need to Know
Welcome — Today, we discuss why certain businesses and industries are considered to be “recession-proof.” The term is catchy and has gained increased attention.
But what exactly does it mean to be “recession-proof”?
In this article, we explore what makes a business recession-proof and how entrepreneurs and small business owners can apply the same strategies and techniques to strengthen their business model.
Here’s what we cover:
What Makes a Business Recession-Proof
First, let’s recognize that the term “recession-proof” is not 100% accurate.
The impact of a recession is different for everyone, and complete protection against a bad economy is unrealistic. However, certain businesses and industries are less susceptible and may even do well during an economic downturn. These types of businesses are often referred to as “recession-proof.”
Why would certain industries and businesses thrive during a recession, while others sink?
The explanation lies in the answer to these two key questions:
- What products and services fulfill consumer needs during bad times?
- What products and services are generally insulated from fluctuations in prices and incomes?
Let’s dive into these two topics:
Fulfilling Consumer Needs
Satisfying consumer demand has a lot to do with understanding patterns relating to consumer behavior.
If you are able to anticipate purchasing decisions, then you can align your business to meet consumer demand.
As an example, let’s take two big outcomes of a recession:
1. Less Money; and 2. Unemployment.
Now think about how a person’s needs and behavior might change when they have a decline in income and lose their job. Naturally, the desire for the following would be higher:
- Cash Preservation
- Emotional & Mental Support
- Employment Opportunities
- Financial Guidance & Supplemental Income
Based on just these four needs, there is a lot to be learned about consumer behavior. Let’s go through each of these.
When it comes to preserving cash, two methods immediately come to mind:
Saving what you already have (not spending) and making smarter purchasing decisions on items you need (smart spending).
Here’s a breakdown of these two methods:
Money Saving Activities – The immediate reaction to protecting money is to save. One fail-safe way to save more (particularly if you live in a metropolitan area) is to go out less.
This translates to a decrease in dining out, travel, and entertainment. So, what do people to do keep busy at home?
Here are some examples:
- Streaming / Online Activities (movies, television, you name it)
- Home Entertainment (games, books, music)
- Social Media
- Cooking / Ordering in / Groceries
- Home Improvement
In addition to expenses associated with “going out,” consumers tend to spend less on luxury goods.
Luxury goods are expenses associated with items that people don’t really need. They are “nice-to-have” – as opposed to necessity items that you can’t live without. This category is huge and subjective, but here are some examples:
- High-end clothing
- Fancy cars
- Jewelry and flashy accessories
- Any item that is a more expensive alternative to a necessity item (particularly due to effective branding)
“Smart” Spending – Spending can’t be completely eliminated. There will always be items that consumers are unwilling to give up. However, people are more willing to change their habits. They might consider more cost-friendly alternatives and methods, such as the following:
- Discount stores, warehouse clubs, and bargain outlets that offer steep discounts (e.g., Costco, Sam’s Club)
- Rewards apps that allow you to get “rewarded” – or even cash back — for spending (e.g., receipt-scanning apps like Fetch and Upside where you get rewards for scanning your receipts or services like Rakuten and BeFrugal where you get cash back for spending at the same stores you would normally visit)
- Services that specialize in finding you the best offers, discounts and coupons at popular retailers and businesses (e.g., Groupon, Swagbucks, Coupons.com)
- Switching to services or products that are bare bones in nature (e.g., making substitutions with less-expensive brands that satisfy their primary need)
EMOTIONAL & MENTAL SUPPORT
In times of financial distress — particularly when jobless — people seek comfort and reassurance.
Financial instability is not a good feeling, especially when you have dependents. It’s not uncommon to experience feelings of fear, panic, and stress.
All of these present health issues and do not help. In fact, those who have severe anxiety and stress about the future are more likely to make poor financial decisions. The American Psychological Association found that 72% of Americans are stressed out about money.
For this reason, consumers are likely to gravitate toward activities that cater to their mental and emotional health. Particularly activities that make them feel happy, connected with others, and positive about the future.
Products, services, and activities that consumers tend to gravitate to include:
- Yoga / meditation
- Mindfulness exercises
- Mental health apps (Calm, Headspace, Moodfit)
- Self-Help reading
- Exercise and related accessories
- Sleep-related items
- Healthy eating
Connecting with Others
- Community- or faith-based activities
- Social media interactions
- Online forums
More businesses are recognizing the link between mental health and money. Consumer Fintech companies, like Nav.it Money are focused on just that. This financial wellness app was launched to help that average person create a healthy relationship between mental health and money.
For those that experience a decline in income, a natural tendency is to increase their “market value” and boost their earnings potential.
Two effective ways to increase earnings potential include 1.) enhancing existing skills/expertise and 2.) acquiring new skills/expertise.
A third equally important channel includes 3.) marketing and branding to increase visibility and draw attention to those skills. And, fourth 4.) expanding business connections who can help vouch for you and open doors.
Below are examples of each of these categories:
Investing in Skills & Expertise
- Online and in-person business courses
- Business books and related reading
- Certification programs and bootcamps
- Business coaching and mentoring
- Newsletters, podcasts, and educational resources that provide actionable insights and strategies
Marketing & Branding
- Thought leadership (writing, speaking, earned media interviews)
- Activities that help promote and build a personal brand
- Coming up with new business ideas (e.g., creating something unique, interesting, and valuable, and then marketing it as a way of highlighting your skills, expertise, and abilities)
Networking & Business Connections
- Membership groups and professional groups
- Networking events
FINANCIAL GUIDANCE & SUPPLEMENTAL INCOME
In economically turbulent times, financial guidance and support is increasingly important. Businesses that help consumers to make smarter financial decisions (such as financial advisors, accountants, and bankers) and provide support (such as lending institutions) are in higher demand.
Online tools and resources that assist with financial education and management are also an effective option.
- Wise Bread – Best for those looking to live more frugally. Wise Bread is a personal finance website that provides “saving hacks,” budgeting tips and advice for living large on little money.
- Zogo – Best for fun bite-sized learning. Zogo is a mobile app that makes education simple, fun, and rewarding. They even pay you to learn.
- Mint – Best for budgeting and managing your money. Mint is a free personal financial management tool that allows consumers to see their spending, balances, budgets and credit score in one place
- Upwise – Best for financial wellness. Upwise goes beyond financial goal-setting to help you create good habits and feel more optimistic about what your money can do for you.
Additionally, any software, tools, and services that help consumers to obtain additional income streams, such as passive income or side hustles meet the criteria for fulfilling an important consumer need.
Websites such as AppSumo, for instance, provide steep discounts and lifetime deals on business tools geared toward helping the average consumer quickly and effectively build a side business.
Insulation From Market Fluctuations
To understand where the idea of being recession-proof came from, it’s helpful to explore the concept of being “insulated” from fluctuations in the market.
Let’s have a look.
There is a fun term in economics called “Price Elasticity.” This refers to the degree to which consumers change their spending habits in response to a change in income or price.
It is a measure of sensitivity. The less sensitive (AKA “inelastic”) something is, the less vulnerable it is to change. If for instance, there is little to no change in a consumer’s buying habits when their income or purchasing power drops, this is described as being an inelastic good or service.
When speaking of “recession-proof” businesses, the concept of inelastic goods and services is just about the closest you can get.
So, what makes a good or service less vulnerable to market fluctuations?
Here are two important factors:
If a consumer believes that they absolutely must have something – such as for their survival or wellbeing – this an example of a necessary item. This would include healthcare, housing, utilities, personal care, food and basic clothing.
However, it may also include things that are specific to certain individuals, such as if they need transportation to get somewhere critical or child care. While some items are easier to identify as a necessity, it also comes down to the perceived importance by the consumer.
Today, almost everyone would consider things such as internet, cell phones and access to social media as a “necessity.”
The next consideration comes down to how easy it is to replace one good or service with another.
Regardless if something is a necessity, if that good can be easily substituted with something else, then consumers may shift away from buying that item.
Goods that have less acceptable alternatives are considered more inelastic. Prescription drugs and tobacco products are the go-to examples. Even if there are similar drugs or tobacco products, consumers may not view them as acceptable substitutes.
Niche (or specialty) products are also a good example. These are products that fulfill a very specific or unique need, such as buffered preservative-free saline solution for gas permeable contact lenses. What’s that?
Software, devices, programs, or tools that have a steep learning curve also do well in this area Particularly, business tools or products that consumers need to do their work (or help them get money).
Consumers who are comfortable using a particular tool, who have invested a good amount of time into learning how to use it, and/or who need the tool for other reasons (such as compatibility), are less likely to make a switch if the price increases.
Brand loyalty is also a significant factor that influence the extent to which a consumer views a product as replaceable. Some would say that they absolutely cannot replace Coca Cola with Pepsi. Examples of popular brands that illicit extreme brand loyalty include: Apple, Amazon, Netlix, and Starbucks.
Availability is closely tied with the extent to which a consumer feels loyal to (or dependent on) a product.
So what does all of this mean for entrepreneurs and small business owners?
Recession-proof strategies that can be applied by entrepreneurs and small business owners
Here’s a quick recap of what we learned above:
Businesses that are viewed as recession-proof, have these two things in common:
- They are extremely good at identifying and satisfying consumer needs; and
- They have products and services that are relatively inelastic
If you’re an entrepreneur or business owner, you might be able to apply these recession-proof strategies to your own business by considering the following:
CONSUMER NEEDS AND BEHAVIOR
First, determine if there is a way you can adjust your businesses to better help consumers in any of the following key areas:
- Cash Preservation
- Emotional & Mental Support
- Employment Opportunities
- Financial Guidance & Supplemental Income
You may be able to help with cash preservation by offering better pricing — such as lifetime deals, promotions, discounts or any other offers that provide financial relief. If your business has nothing to do with health and wellness, business tools, or educational resources, try this:
- Research historical patterns to identify how consumer behavior and activities generally change during economic downturns
- Monitor the market closely prior to a recession period and keep a pulse on any changes in consumer trends and behavior
- Consider your own pain points and the problems that a recession causes in people’s lives
- Using steps 1-3, brainstorm and write down a list of relevant customer needs and activities that you have the ability to address
By exploring what you can offer to align with changes in consumer behavior and needs, you can come up with additional business ideas and offerings. The idea is to cater to the things that address what people want and do during bad times.
If your business addresses a relevant pain point and takes into account anticipated changes in consumer spending, you will be more “recession-proof.”
We’ve seen that some industries and businesses are inherently less vulnerable in down markets due to the following key factors:
- Scarcity (e.g., less availability)
Entrepreneurs and business owners may be able to further recession-proof their business model by doing the following, where applicable:
- Add a “necessity” product/service to your business line
- Make your product/service more unique or add a new niche product that specializes in solving a very specific need for your customer
- Consider adding software, programs, or tools to your business offering (particularly those that help improve your customer’s lives in the areas of finance, health and wellness or work/career)
- Enhance brand loyalty to the extent your customers fall in love with you
So far, we’ve discussed addressing consumer needs and improving insulation.
One other consideration is that businesses with 1. low upfront / overhead costs; and 2. minimal-to-no physical inventories may also be better positioned in a recession period.
This is because they can more easily adjust and cut costs.
Retail stores for example are stuck with fixed costs, such as rent and the cost of having their product in the store. If customers are not buying their product, they are losing money.
For this reason, companies such as online agencies, eCommerce stores, and SaaS companies are generally considered to be more resilient because they can scale back and adjust their costs quicker. They are also less susceptible to supply chain issues.
Businesses such as those focused on real estate might do well for other reasons. They can take advantage of price fluctuations. For instance, when real estate prices and interest rates are low, this presents an investment opportunity for buyers – which translates to income on home sales.
Recession-Proof Cheat Sheet
Here’s a summary of the key points we learned from recession-proof businesses.
- Help consumers with one of the following:
- Better pricing and offers that will save them money
- Emotional and mental wellbeing
- Job skills and business opportunities
- Navigating financial waters and getting supplemental income
- Focus on products/services that are generally viewed as a necessity (what can’t people live without?)
- Further differentiate your product/service or add a new niche product that specializes in solving a very specific need for your customer
- Consider adding software, programs, or tools to your business offering (particularly those that help improve your customer’s lives in the areas of finance, health, and wellness, or work/career)
- Inspire brand loyalty and make your customers fall in love with you
- Reduce your overhead and fixed costs as much as reasonably possible
- Build your online presence and see if there is an opportunity to provide online services or products (e.g., online consulting, eCommerce stores, SaaS products)
- Diversify your client base and business offerings so that you can meet consumer demand during downtimes
Final Thought: Practice Being Recession-Proof
Regardless of the financial climate, entrepreneurs and small business owners can benefit significantly by applying some or all of the above concepts, strategies and techniques.
The strongest and most successful businesses often prepare ahead of time and plan for different outcomes.
Over the coming month, we will also share five (5) tips for entrepreneurs, founders, and small business owners to prepare for a recession and grow revenue potential.
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