Expanding In A Recession
Barely a day has gone by over the past couple of months in which I haven’t read about some company or other downsizing their workforce, cutting services or otherwise attempting to lower costs. Everyone knows that companies have to tighten their belts to get through a recession. Well, not everyone.
Andy Liu wrote a post the other day questioning the wisdom of such a response. He suggests that a recession is the perfect time to expand, when everyone else is contracting. Unfortunately, by using an analogy of a lemonade stand, he misses the key problem of his suggestion: it’s expensive to run a business during a recession.
If you’re business has very low overhead, or you have a lot of money banked away, it makes sense to expand; when everybody else is slimming down their business, market share can be bought relatively cheaply. But don’t fool yourself into thinking that this market share is going to pay for itself in the short term. You expand during a recession by accepting financial burdens that your competitors would rather avoid; if market share expansions paid for themselves, everyone would be growing.
While there is plenty of opportunity to expand during a recession, this isn’t helpful to the majority of startups. A site can only be run cheaply so long as it has comparatively few users. As soon as it begins to expand, hosting costs rise and staff need to be hired to maintain the system, all while earning next to next to nothing from it’s newfound user base, since the advertising market shrinks and users stop spending.
So if you think you have enough in reserve, go for it, grab every last customer you can, but be careful what you wish for: no-one yet knows when this recession will end.
