Recessions are the worst time to fight for demand. And recessions are a great time to create demand.
Dear Friend, Subscriber, and Category Pirate,
We are in a recession.
(Not officially, but it is not looking good.)
Stocks are down. Startup valuations have plummeted. Bitcoin and Ethereum have lost more than 50% of their total value since their respective highs back in November, 2021. And sentiment around Silicon Valley is that the next 12-18 months are going to be challenging for companies looking to raise money.
But where there is chaos, there is opportunity.
Through the category lens, downturns are simple to understand—and have a clear path to navigate. When times get tough, businesses, governments, households, and individuals all do the same thing: they create two lists.
- “Must Haves”
- “Nice To Haves”
Then they start cutting the “Nice To Haves” to lower costs—as a direct response to their revenue / income / buying power shrinking.
Which means the seminal question is: what makes people put some categories/brands/products on the “Must Have” list versus the “Nice To Have” list?
(Everything we value, we’ve been taught to value.)
The difference between a dumb idea and a great one, or the difference between useful products and useless ones is the perception we have based on what we have been taught. (Don’t forget: pet rocks used to be in demand.)
The trick is to get your product/service/platform on the “Must Have” list, and to be as high up on the list as possible. Because the higher the category is on the hierarchy of perceived value in the consumer’s mind, the greater the likelihood they will keep buying from you.
Which is why savvy leaders market the category in downturns.
Because people make their lists by category first, and brand second.
(“Alright Tom, we are paying for 3 different streaming (category) services right now. Which one (brand) don’t we need?”)
Elon Musk was a guest on the All In podcast and summarized the net-positive effects of recessions well:
“Recessions are not necessarily a bad thing. I’ve been through a few of them. What tends to happen, if you have a boom that goes on for too long, you get misallocation of capital. It starts raining money on fools, basically. Any dumb thing gets money. At some point, it gets out of control… and the bullshit companies go bankrupt and the ones that are building useful products are prosperous.”
When most people hear the word “recession,” they imagine the housing crisis of 2008 or the dot-com bubble in the late 90s—and all of the businesses that went under as a result.
But what doesn’t get talked about enough are the incredible companies that emerged out of these challenging times as well. Google and Amazon both came out of the dot-com bubble in the 90s (as did hundreds of other world-changing companies). And Uber, Spotify, Airbnb, Square, and dozens of other next-gen technology companies were founded between 2006 and 2009, right in the middle of the greatest financial crisis to ever threaten America.
Recessions are pressure-cookers that rid the system of businesses failing to live up to the value they are promising society.
Here’s how it happens:
The Company Downturn Cycle Of Doom
Step 1: Recession hits.
Stocks crash. Capital dries up. Investors stop playing as many hands and start sitting out of deals. Consumers tighten their belts and begin to examine their spending habits. The music comes to a halt and everyone in the room stops dancing.
Step 2: Demand falls.
The result of all this “tightening” is that consumers spend less. Suddenly, that vacation you were planning (and that Airbnb you were looking at) goes from a “need” to a “want.” And not just a “want,” but a “want” you have to work harder and harder to rationalize to yourself. Companies (like Airbnb, for example), immediately feel this change in temperature. Bookings go down. Revenues fall. Inventory builds up at large retailers like Target and Walmart (43% and 32% year over year respectively) that has historically led to both big chains missing revenue expectations. Not by a lot—just enough to make everyone pause.
Step 3: Companies start playing “The Better Game”—hard.
Demand has started falling, which means companies that have employees to pay and investors to keep happy need to work twice as hard to earn the same amount of money they did a few months prior. Their entire strategy becomes to “catch” demand. As a result, they fall into The Better Trap, which is often “my deal and discount is better than everyone else’s.” These companies believe there is a fixed number of people willing to spend money in this current environment, and they become myopic about convincing those select few customers to shop with them (opposed to one of their competitors—who are furiously doing the exact same thing).
Step 4: Customer acquisition cost goes up.
Before the recession, customer acquisition costs were $X. Now, they are 2x, or 3x, or 5x times higher. For every dollar you used to spend acquiring a new customer, you now have to spend two. This chops your profit margins down a size, which accelerates the existential threat to your company.
Some tech startups burn half of their venture investors’ money on demand capture with Google and Facebook. And executives who have already dug themselves a deep competition hole drive CAC through the roof as they try desperately to catch the falling demand knife in downturns.
Step 5: Cash flow goes in the wrong direction.
Lowered revenue and profit margins lead to lower cash flow.
Which means now you’re spending more to make less cash.
But it’s not just you. It’s you, plus all your competitors, plus all the other tangentially related companies in your industry, plus all the other companies that have cash flow going in the wrong direction. As a result, cost of capital increases as valuations/market caps go down, while debt and credit financing go up with interest rates.
Until eventually, your company runs out of money.
Recessions are the worst time to fight for demand. And recessions are a great time to create demand.
The truth is, you never want to be in a position where you have to “fight” for demand. (We call this The Better Trap.)
But in a tightened environment, fighting for demand is the equivalent of trying to run a marathon while simultaneously holding your breath. Running is taxing. And depriving yourself of what you need to breathe is also taxing. Both at the same time is the worst idea you could have.
Instead, especially in a recession, the people who know how to create demand become most in demand.
- They create what is suddenly urgent, important, and most useful in the world.
- They remove themselves from “comparison” conversations and educate customers on “different” problems, solutions, and outcomes (that they likely haven’t considered before).
- They allow “competitive” companies to waste their resources fighting against each other, and leverage this unique period of time to create net-new opportunities for themselves and the customers they want to serve.
- They force a choice, not a comparison.
- They elevate the value of what they do (at the level category level, not the product/service level).
Your Money-Making Recession Strategy
Step 1: Create High-Value Non-Obvious Insights
We wrote about how to do this in our mini-book, The Art of Fresh Thinking.
Non-Obvious insights are what unlock exponential value that did not exist before (that’s what makes them Non-Obvious!). How you find them is by auditing today’s newest, hottest, most popular solutions—because today’s solutions create tomorrow’s problems, and tomorrow’s problems create category opportunities.
By auditing the solutions society values most heavily today, what you’re going to find are emerging (potential) categories with strong tailwinds behind them. And solving tomorrow’s problems before anyone else is just another way of saying “solving Non-Obvious problems.”
And these problems are Non-Obvious because the world hasn’t realized which way the wind is blowing yet (which means you can be the first to frame tomorrow’s problems, provide a solution, and own the category of outcome).
For example: let’s pick up the story from the Downturn Cycle of Doom. You want to build up cash reserves, but both the equity and debt capital markets are unattractive. What can you do?
Look within your value chain by turning to your Superconsumers or suppliers.
Supers are the most recession proof part of the economy because they have certainty of demand that lasts decades longer than any economic cycle. They are also the savviest consumers in the category, so make them an offer they can’t refuse. Create a bulk bundle that gives them a great volume discount. Subscriptionize your product or service in a longer term deal that gives you cash up front for services in the future. (Cash now is always better than cash later.)
But there is another growth secret about Supers:
If you are radically different and deliver transformational outcomes, they will never let you go.
The very last Blackberry users held on ‘til January 4th 2022 until the company pulled the plug. They were Supers. These Supers hold on because they “need” you. The category is part of their identity. It’s built into a part of their work and broader life. They have invested money, time, and in some cases part of their spirit into the category and the category leader’s brand and offerings. Another great example: during the early 2000s Microsoft stopped innovating for about a decade. They took ten years off. They did very little product, technology, and category innovation… and ended up missing the entire Cloud category.) You’d think they would have crumbled, and competition would obviously overtake Microsoft with clearly “better” products.
So why is Microsoft still one of the most successful and valuable companies in the world?
Supers wouldn’t (couldn’t) let them go! Microsoft had approx 90,000 employees, 640,000 partners, and a billion users in 2010. (All with exorbitant switching costs and huge investments with Microsoft). So—driven by the trendsetting Supers—the category held on, even as Microsoft looked like it was becoming Wang Laboratories. Then, once they started to innovate and create and (re)design categories under the leadership of Satya Nadella, they executed one of the greatest turnarounds in history.
Said a little differently: Pirate Eddie is an electric vehicle/Tesla Super. Pirate Christopher, on the other hand, refuses to buy one. He loves American Muscle cars—and has a deep personal relationship with his 2014, 662 horsepower Shelby Cobra Mustang. (Category first, brand second.) And no amount of marketing will ever get Pirate Christopher to buy a Tesla, or Pirate Eddie to buy a Shelby Cobra Mustang. Instead, marketing dollars would be better spent educating a Super like Pirate Eddie on why he should pre-order the new Tesla Cybertruck, or a Super like Pirate Christopher on why he should add a handful of vintage, collectable Mustang parts to his classic Shelby Cobra.
Instead of trying to market to new customers, consider how you can increase cash flow by getting your Supers to open up their wallets and buy more of what they already (clearly) love.
Here’s another example:
Guitar players universally respect (and many “love”) the legendary Gibson. But after expanding recklessly into adjacent categories, with a competitive/comparison mindset, the company collapsed into bankruptcy. Old management out. Then, new CEO JC Curleigh declared a “true to roots” initiative. Translation: “We’re going to focus on our Supers in our core categories with our most legendary products and brands.” The company, after very strong complaints from Supers, also stopped attacking smaller knock-off competitors and created an “Authorized Partnership Program” with boutique guitar makers.
This is a legendary example of a strategy that expands the category potential while diverting attention and resources from competing to monetizing collaboration at the same time. And it works for companies of all sizes. Satya Nadella and Microsoft did the same.
“So it is notable that Nadella has put Microsoft back at the top of the tech heap without attracting the resentment and anxiety provoked by some other tech leaders—or, for that matter, Microsoft’s own former self. The software company was once considered to be the model of the corporate bully, using its dominance over PC software to hold sway over the tech world.” —L.A. Times.
But big suppliers also have an interest in making sure their partners whom they sell through survive a downturn. Sometimes the same company or person can be both Superconsumer and supplier.
The most legendary example of this is when Microsoft invested $150 million into Apple, effectively saving Apple from bankruptcy in 1997. In exchange, Microsoft provided Office to Macs and Apple made Internet Explorer the default browser which helped Microsoft appear less monopolistic as it was negotiating a lawsuit with the government.
“In a way, you could say it might have been the craziest thing we ever did. But, you know, they’ve taken the foundation of great innovation, some cash, and they’ve turned it into the most valuable company in the world.” —Steve Ballmer, former CEO of Microsoft in 2015.
So next time you look at your iPhone, iPad, or Apple Watch, make sure you say thank you to Steve… Ballmer. We’d bet you the Brooklyn Bridge that it took a lot of Non-Obvious thinking from both Mr. Ballmer and Mr. Gates before getting that buck fifty to Jobs.
Today both Apple and Microsoft are two of the most valuable companies in the world with multi-trillion dollar market caps. And Microsoft made around $550 million from its Apple lifeline—a 260% gain in just six years.
These are the kinds of Non-Obvious insights much of the business world tends to avoid looking for and thinking hard about (“Why would we ever help our competition?!”).
But these Non-Obvious insights are often what lead to incredible opportunities and abundance for all.
Step 2: Convert Your Non-Obvious Insights Into Intellectual Capital
Peter Drucker was the one who named & claimed the idea of being a “knowledge worker” as someone who earns with his or her mind, not their muscles.
But he first coined this term back in 1959, and the world has changed dramatically since then. In a world where information is a commodity (where a 7-year-old can ask their smartphone how many home runs Babe Ruth hit, or how many stars there are in our galaxy), having “knowledge” today isn’t nearly as valuable as it used to be. When Drucker invented the term “knowledge worker,” the game of business and life was to acquire knowledge and then apply knowledge—a doctor gets paid per hour to apply their knowledge of medicine, a lawyer gets paid per hour to apply their knowledge of the law, etc.
Today, the game is to acquire knowledge, leverage Non-Obvious insights to build upon that knowledge, and create net-new Intellectual Capital. This is knowledge that did not exist before you took the time to draw a conclusion between two or more disparate, maybe even conflicting ideas and/or data points.
And how do you find these Non-Obvious insights?
Again: talk to your Supers!
Most companies launch innovations after months or even years of prep work behind the scenes—only to let their big, grand reveal fall on deaf ears.
But savvy companies understand that Superconsumers can be a source of precious real-time feedback in a soft launch that dramatically increases the odds of success. Tesla is doing this right now with its full self-driving beta, releasing it to only 100,000 users who will use it safely and provide massive amounts of data to optimize and improve the feature before its full rollout. Or, another example: Safeway (the supermarket chain) used to test its private label innovations in just a few stores, get feedback, and then optimize and roll them out nationally afterwards. Michael Fox, the former CMO of Consumer Brands at Safeway and now CEO of California Olive Ranch noted that their innovation success rates were much higher than they were back in his Frito Lay days where he had significantly more resources.
But Supers don’t have to just be your customers.
Supers among your employees are some of the best sources of Non-Obvious insights. When Steve Hughes was at Tropicana, he was walking the factory floor when he saw some of the workers enjoying a glass of orange juice after their shift. Right then, he noticed something Non-Obvious… they were putting the pulp that the factory had just painstakingly removed back into the glass. He asked them why and they said it tasted even more like fresh squeezed orange juice. Steve took that Non-Obvious insight and led the creation of Tropicana Grovestand with pulp, which became a billion dollar product.
The takeaway here is: don’t think of innovation as something that has to happen in a vacuum (we know too many founders, business owners, executives, and investors who need to feel like “they” were the ones who came up with the company’s big, game-changing idea).
Instead, talk to your Supers—customers, clients, and employees. Ask them questions. Let them tell you what their biggest pain points are, and their wants and needs and hopes and dreams for the category. See what they are doing and join in.
Supers will usually tell you the right answer (or at least point you in the right direction) if you take the time to listen.
Step 3: Convert Your Intellectual Capital Into Digital Products/ Services/ Businesses
When you create Intellectual Capital, you have something no one else does.
Which means you no longer have to “fight” for demand.
You can create it.
Even in a tightened economic environment, you have the opportunity to educate people on your new, different, Non-Obvious insights. During times of crisis or change people are naturally more open to different ideas. They are very aware they are living in an obviously different world (think about the COVID-19 pandemic), which challenges their historical assumptions, which opens the aperture of their minds and makes them more willing than normal to consider a Non-Obvious, different future (and all the new categories that can or should exist in that new and different future).
Non-Obvious insights are significantly more valuable than Obvious, commodity insights (things the world has already priced, and already determined whether they want or do not want), which means you can charge more for them—look at you thriving in a downturn! In addition, when you can plug your Intellectual Capital into frictionless, infinitely scalable, digital platforms and products, you can also monetize your “knowledge” in a way traditional knowledge workers cannot (that’s the beauty of software, newsletters, websites, podcasts, and content). A doctor only gets paid when she or he performs a surgery. And a lawyer only gets paid when she or he accumulates billable hours. But these rules are not true for a SaaS company or any form of digital content/creation. These are “build once, scale-massively-at insane-margins” businesses that go ching-ching-chitty-ching-ching (as in an old-school cash register).
Getting paid in the future for Non-Obvious insights you created/published in the past is Intellectual Capital.
We want to be clear here though: Intellectual Capital isn’t just “theory” for professional services firms, but is a strategic asset that turns into an economic asset. For Intellectual Capital to be given a value or price, it needs a market where buyers and sellers agree. Which means you have to either plug your Intellectual Capital into a marketplace that connects Superconsumers and suppliers that maximizes monetization and/or mindshare, or create one yourself.
For example, a few years after nearly avoiding bankruptcy, Apple launched the iPod and iTunes store in 2001. iTunes was the Intellectual Capital pivot from Apple being a product and software manufacturer to an Intellectual Capital based ecosystem. Both iTunes and the App store are an Intellectual Capital marketplace platform where Superconsumers and suppliers can meet and transact, all while Apple both takes a cut but also ensures its relevance as the center of gravity in the category.
Now, obviously not every business is going to go create a multibillion-dollar next-gen marketplace—that’s not what we’re saying. Digital content/products is the lowest-barrier-to-entry way to scale your Non-Obvious thinking (and Intellectual Capital) in a way that does not require you to show up to the office and perform surgeries and/or rack up billable hours.
It takes us approximately 6-10 hours per week to write each Category Pirates mini-book. And this amount of time, energy, and effort remains constant whether 6 people, or 600 people, or 6,000 people, or 6 million people read it—allowing our earnings as writers and Intellectual Capitalists to be “infinitely scalable.” Which is the opposite of even the most prestigious legacy “knowledge work” where income scales linearly with time, energy, and effort.
(Pirate Chrstopher’s podcasts have been downloaded in 190 countries. And while he’s done a lot of traveling, he’s never been to many of the places his work has been downloaded in.)
Even the highest-paid knowledge workers today are beginning to wake up to the fact that life is much better when you’re an Intellectual Capitalist. (Which is why 86% of Native Digitals want to be creators, not lawyers.)
Step 4: Design New Categories For New Digital Products/ Services/ Businesses
Once you build the skill of being able to spot and create Non-Obvious insights and turn those insights into unique, differentiated, one-of-a-kind Intellectual Capital, you can create net-new categories in the world.
Over and over again.
Again: the people who know how to create demand become most in demand.
Apple used its early success with iTunes to build more marketplace platforms like the App Store where consumers could not only transact, but also create and commercialize. And Whole Foods has its Local and Emerging Accelerator Program (LEAP) to incubate new brands and categories to be sold in its stores.
Jeff Bezos, who has recently let loose on Twitter, tweeted a cover of a 2006 BusinessWeek magazine calling his software bet “risky.” The bet was predicated on the Non-Obvious insight that Amazon’s B2C growth required more computing power, but that building Amazon’s cloud capabilities could also be remonetized as a B2B service. That software bet became AWS, which generated $62 billion in revenue last year (and is one the greatest B2B tech companies ever).
The big idea here is to consider what “costs” you can turn into revenue-generating machines. Instead of just assuming every business needs to spend money on marketing, or fulfillment, or distribution, or customer service, how can you create new categories, products, and services that turn those cost centers into revenue generators?
For example, here’s one way we have done this with Category Pirates:
You give us our book advance, not a big publisher.
When we originally started Category Pirates, we just wanted to write a book. And most people who want to write a book consider the legacy business model for “writing books”: pitch a publisher, get an advance, give up 85%+ ownership in the book, and publish it 2 years later (and we had multiple publishers interested… just sayin’). The “cost” here, however, is that even though you get paid some money up-front, you have to give up majority long-term ownership.
Instead, we flipped the model on its head and decided not to write a book (first), but to write our book “in public” via a paid newsletter.
This allowed us to…
- Build an audience while we explored new material—opposed to building an audience in the 9th hour, right before the book’s launch.
- Charge per month or per year opposed to “for one book”—unlocking more digestible, “read at your own pace” content for readers and more financial upside for us (most authors charge $20 per book, we charge $20 per month or $200 per year. That’s a 10x difference!).
- Have readers “pay our advance” to write the book. Instead of a publisher giving us $50,000 or even $100,000 up-front and then taking 85%+ ownership, readers pay us $20 per month or $200 per year, giving us some cash “now” and essentially paying us to write (which means we no longer have to pay the cost of giving up 85%+ ownership).
- Our Super readers buy both: the newsletter and the book. When we published our first two books last year (2021), The Category Design Toolkit and A Marketer’s Guide To Category Design, we learned that our Superconsumers didn’t want one or the other (the newsletter content or the big book content). They wanted copies of both! (Remember: Supers buy more, more often.)
These types of opportunities exist everywhere. And together with your Supers, you should be able to learn what “cost centers” you can turn into revenue generating win-win scenarios for you and your most enthusiastic Intellectual Capital consumers.
Step 5: Market Your New & Different Category—And Win
Businesses that thrive in recessions have no competition.
They avoid The Company Downturn Cycle Of Doom completely. They do not waste their time trying to “catch” what little existing demand is left for products or services the world may have concluded (in an instant) no longer serve them. Instead, these Category Creators use their time, energy, and resources to create net-new demand by solving tomorrow’s problems, today.
And as a result, they emerge victorious.
- Apple will be increasingly known as a subscription and marketplace company versus a hardware company.
- Whole Foods may increasingly be known as a venture company (incubating and/or investing in new products) as much as it is a grocer.
- Amazon will be increasingly known as a B2B services and technology company as it is a B2C e-commerce retailer.
Now is no time to work on the incremental.
Repeat this over and over again to yourself, like a mantra.
When the world is thrown off-balance, now is not the time to batten down the hatches and fight over a limited number of resources. That’s not what the world needs, and that’s not what you need in order to thrive.
Instead, this is your chance to create what has not been created yet. As we said at the beginning of this mini-book, some of the world’s most legendary companies were born out of downturns. This is not an expectation for you to go create the next Google or Uber, but should serve as a reminder and Rally Cry for your full potential.
Now is no time to work on the incremental.
Now is no time to work on the incremental.
PS. – When the going gets tough, the tough design new categories.