Is your business prepared for a potential recession or will your organization fold in the face of economic tribulation? Mike Slavin, Business Consultant at Vendavo illustrates how pricing professionals can prepare for the uncertainty to come.
Is there a recession looming on the horizon? And if so, how is it going to impact businesses? Is your business ship at risk of heading for the rocks? These are all good questions. As the great gauge of economic uncertainty (a.k.a. the stock market) continues to indicate, nobody really knows. But instead, let’s ask: how can pricing professionals prepare for a potential recession? That’s a question that we can answer.
“Powell Warns US Recession is Certainly a Possibility”
– Financial Times, 6/22/22
“World Bank Warns of Recession Risk due to Ukraine War”
– BBC, 6/8/22
Defining a Recession and Exploring the History of Recessions in the United States
Economists vaguely define a recession as a “significant decline in economic activity lasting more than a few months”. The National Bureau of Economic Research, the official recession score keeper, goes deeper defining a recession as “a monthly concept that takes account a number of monthly indicators—such as employment, personal income, and industrial production—as well as quarterly GDP.”
There have been 19 recessions throughout U.S. history – some more noteworthy than others. Nothing can top The Great Depression of 1929 – 1933, with five straight years of economic contraction, double-digit unemployment, bread lines and overall misery. But long before that, the recession bandwagon first emerged when everyone’s favorite Broadway character, Alexander Hamilton, championed the establishment of the First Bank of the United States. This move contributed to a loosely controlled increase in the domestic money supply leading to rampant real estate speculation and The Panic of 1797. Who can forget 1873, when the construction of the national railway system created speculation that resulted in the failure of the largest U.S. bank – and a six year recession? And what followed the Great Depression almost a century ago? The Bureau notes recessions in 1937-38, 1945, 1949, 1953, 1957, 1960, 1970, 1973-75, 1980-82, 1990-91… The good ‘ol days? How did we survive the 20th century?
The 21st century marked recessions in 2001, thanks to the dot-com bust and 9/11; 2008-09, with a tip of the hat to the global banking and credit crisis. Most recently, the short-lived pandemic-fueled recession of 2020, which included a record economic contraction of 31.2% in the second quarter, accompanied by unemployment of 14.7%. Big, bad numbers in 2020, but the (relatively) quick turnaround as seen in the major economic indicators highlighted a key characteristic of recessions:
While they’ve all be called ‘recessions’, each one had its own unique set of causes, effects, and eventual resolutions.
How a Potential Recession Could Impact Your Business
As with recession’s kissing cousin, inflation, while the overall economy may be contracting in a recession, performance of different business sectors and individual companies can vary wildly. We may not be in a recession just yet, but we’re starting to see cases of this already. Airlines, for example, are returning to profitability this year and are expecting even more growth in profits in 2023, meanwhile they can’t seem to hire pilots and support staff fast enough. As interest rates and prices creep up how much longer can we expect real estate, home construction, and auto manufacturing to continue to grow?
It’s difficult to predict how a recession will impact a specific company. With a few exceptions, it’s basically impossible. The best thing businesses and pricing professionals can do with a recession looming on the horizon is to ramp up analytic processes and prepare to recognize and react. We all know that pricing can be one of the most effective levers to pull when help is needed to maintain or increase margins and revenues.
Using Price/Volume/Mix Analysis to Weather the Recession Storm
If business starts to slide, when is it time to panic? Better yet, how do we avoid panic in the first place? If your company can’t quickly and accurately isolate cause and effect of period over period changes in revenue and margin, you’re probably going to be in for stormy economic seas. The good news is that there is a solution for this problem. With a strong, well-defined process for price/volume/mix analysis, that rolls up for top-level reporting but is still drillable with agreed definitions, businesses can quickly explain the variation of period over period revenue and margin by isolating changes in things like:
- Sales volume
- Product and channel mix
- Currency fluctuations
- Other dynamic market factors
So is your business ship headed for the rocks? To continue the analogy, while you may not know the exact direction the wind is blowing, and you might not be sure where rocks lurk just below the surface, you can identify likely situations, and then aggregate them into a set of possible states – scenarios that cover the assumptions in your plan, and variations to those assumptions with mitigation actions.
A price/volume/mix view can be used to organize and measure the actions you take. And remember – it’s very unlikely that you’ll dial in the actual course you take through the storm, but by having stretched your planning muscles, your team will have confidence that they’re ready to take on the challenge.
Your business may or may not be headed for a recession, but with the right solution like the Vendavo, you’ll be able to understand what’s going on and make decisions that should help keep your business ship off the rocks.