Using the Highs and Lows of Business Cycles to Create a Thriving Business

Every business, no matter the product they sell or service they provide can fall victim to the highs and lows of the business cycle. How you handle these highs and lows can mean the difference when working to create a thriving business. It is true each business is subject to different cycles, but every business can react to these cycles in the same manner as it works towards creating a thriving business.

When we talk about business cycles many immediately think of the roller coaster ride associated with economical recessions and booms. However, business cycles can also be as subtle as seasonal or weather cycles or cycles caused by vacations or shutdowns.

Having systems in place to help you cope with both the highs and lows of industry cycles will help to ensure that your business will continue to thrive. If you are not prepared for a boom it can cause just as much damage for your business as a recession. Here are some of the examples of ways to combat business cycles:

Offer a Complimentary Service

For those affected by weather seasons, offering a complimentary service can provide your business with the business needed to weather the seasonal cycle. For example, a Northern Canadian lawn care business would not have a vast demand for their services in the winter, but if they were to offer snow plowing in the winter to offset this slowdown they could find a consistent and steady income. Another example, if you do outdoor construction projects and you can’t work in the summer because it is too hot, why not target an indoor construction project until temperatures cool enough to return outdoors.

Target Opposite Markets

Look to the cycles of your target market and find someone at the opposite end of a cycle to assist during slow times. For example if you are a bookkeeper whose clients are mostly construction workers and the construction season is slow during tax season, why not offer your services to an accountant, who could probably use your help. Another example is if you target women to buy your product and right now they are not purchasing your product, figure out what changes are necessary to encourage men to buy your product.

Outsource or Subcontract During Busy Times

When many business owners hit a peak period or busy time they begin to feel the pressures and stress of meeting all the associated deadlines. It does not always make good business sense to hire employees to help you during busy times, although in some industries (e.g. farming and construction), seasonal employees have become the norm. An excellent alternative is to outsource or utilize a subcontractor during busy times. The advantage of outsourcing is there are no obligations other than those associated with any contract you might sign. By utilizing subcontractors you can still have quality assistance with the knowledge there are no long term commitments required.

Offer a Reduced Rate or Discounted Rate

During slow times offering a discount may give you the competitive edge you need. I have heard of many companies offering different rates depending on their workload or the interest in their product or services. Just consider the retail industry; many times they have sales in January and February because this is their slow season and they are looking to generate interest in their products.

Increase Your Price to Deter Business

Just as many will offer a reduced rate during slow times, the same holds true during busy times. Don’t be afraid to increase your price when you are busy. After all, much of our pricing is based on the laws of supply and demand. Many will still be willing to pay your price even if it is inflated because they require your services immediately and for those that aren’t willing to pay the price now, it might hold them off until your business slows down a bit.

Offer Your Services to Someone as a Subcontractor

During slower times, why not consider offering your services as a subcontractor. Although subcontracting doesn’t necessarily pay as much, it is better than having no income.

Develop a Marketing Strategy to Create Interest

Perhaps the most obvious strategy for dealing with cycles is to look at your current marketing strategies and make adjustments. Perhaps you could introduce a contest or start a promotion that is exciting and gives people a renewed desire to check you out. In the same regard taking a close look at how you are spending your marketing dollars and trying something different might be the key to helping you get through an industry low.

Plan for and Learn to Live with the Cycles

As they say, if you can’t beat them join them. Perhaps the easiest way to handle industry highs and lows is to just accept they will happen and develop a way to live through them. Perhaps during the lows you see this as an opportunity to take a much needed vacation and a high as an opportunity to really get out there and show them just what you can do.

However, you deal with the highs and lows of your business, only someone that can learn to fasten their seatbelt and enjoy the roller coaster ride will truly have created a thriving business for themselves.

The Fed Will Allow Business Cycle To Play Out Longer This Time!

The Federal Reserve played its part well, along with the Treasury Department, the White House, and Congress, in helping prevent the financial meltdown of 2008-2009 from turning the ‘Great Recession’ of 2007-2009 into the next Great Depression.

But its solo intervention with its QE2 quantitative easing program last year to boost the again faltering economy seems to have only delayed the business cycle.

Just over a year ago, unemployment was above 9%, home sales were declining, consumer and business confidence were deteriorating again, and the stock market had rolled over into a correction and seemed to be predicting the economy was sliding into another recession. And sure enough, in July of last year it was reported that the economy had unexpectedly slowed to growth of just 1.7% in the 2nd quarter of the year.

The Fed rushed in with its QE2 program of buying massive amounts of U.S. Treasury bonds on a monthly basis to give the economy a boost, admitting it was an experiment that had never been tried before.

The stock market surged up in response, the S&P 500 gaining a huge 34% from its low in July of last year to its peak in April of this year. Yet so-called ‘smart money’, including corporate insiders and institutional investors, seemed not to believe the QE2 program would work. The rally was on strangely low volume, few participants, and with corporate insiders selling into the strength all the way up.

The score card is now in on the Fed’s QE2 experiment.

Here we are a year later, and the economy is in worse shape than last summer. Unemployment remains above 9%. Home sales are on track to be worse than last year. Consumer and business confidence is at new multiyear lows. Government debt and deficits are a $trillion or so higher. And whereas last year economic growth was 3.7% in the first quarter and 1.7% in the second quarter, this year GDP growth was only 0.4% in the first quarter and 1.0% in the second quarter. This year the stock market again topped out in April and has given back most of the gains it experienced under the influence of QE2, potentially in anticipation that the economy is again sliding into recession.

This time, even though the economic slowdown in the first half was much worse than when it intervened last year, and monthly economic reports so far for July and August show the slowdown worsening so far in the 2nd half, the Fed has decided to let the business cycle run its course, at least for a while longer.

In his much anticipated policy speech on Friday, Fed Chairman Bernanke said the Fed will do nothing for now, but will take another look at conditions at its FOMC meeting on September 22. He also cautioned that the Fed’s powers are somewhat limited, apparently learning from last year’s mistake with QE2.

The business cycle is a dangerous thing to monkey with. It’s been in place since the founding of the country, and before that in other free-market systems.

Over the last 110 years there have been 25 bear markets, or one on average of every four years or so. The two times when they did not take place approximately on that schedule were in the 1920’s and 1990’s, when both times the economy and stock market continued for ten years without corrections of the excesses. The results were devastating, the 1929 crash and Great Depression, and the severe 2000-2002 bear market (which was then followed by the so-called ‘lost decade’ for the market, which remains well below its 2000 peak even 11 years later).

With the last bear market having begun in 2007, just about four years ago, the market may be trying to get back to its historical schedule of a smaller bear market on average of every four years instead of government induced longer bull markets and then more severe periods that follow.

Meanwhile, the Fed’s decision to let the business cycle play out at least for awhile longer this time does fit in with my prediction at my May 8 sell signal, that given the failure of QE2, the Fed will be less willing to step in this time, that the market is likely to experience a more significant correction in its unfavorable seasonal period this year, with the Fed not stepping in until the fall, to provide a boost just in time for the market’s next favorable seasonal period of November to May.

But the market does not move in a straight line in either direction, and after its severe plunge of the previous four weeks and the resulting short-term oversold condition, a short-term oversold rally has been underway this week in spite of the worsening economic reports.

Entrepreneurs, Take Advantage of the Business Cycle Phases

I recently met with my financial advisor and our discussion sparked an idea for this post. I am going to discuss the business cycle and how as entrepreneurs we can better position ourselves to take advantage of the phase changes.

The Business Cycle

As you know there is an ebb and flow to our economy with times of prosperity and times of poverty. If you are not aware of this you need to open your eyes. The big thing to note however is that the cycle is just that, a cycle. No time of prosperity or poverty ever lasts forever. What does this mean for you and I? It means there are continual opportunities to position yourself and your business to make a profit. This is the strategy my advisor and I are following with my portfolio. The cycle can be thought of as the a Sine wave.

This isn’t entirely true of course but it does illustrate the general rise and fall. The common approach is to break the cycle into four parts: Recovery, Prosperity, Recession, and Depression but, for the sake of this article I have broken the cycle into 6 parts. The image below breaks the cycle into 6 parts each found between inflection points. The idea here is that the inflection point denotes the beginning of a change. “A” represents the recovery phase, “B” is growth, “C” indicates maturity, “D” can be considered to be a correction, “E” is decline, and “F” the beginning of the next recovery. This cycle as I said is not perfect but has roughly a 2-3 period.

Why should you care? Just as an investor will change his portfolio for the coming economic land scape you can position yourself accordingly. For example companies that do well in recovery are generally smaller firms that assist in efficiencies. Doing more with less is the name of the game in recovery. IT businesses can find themselves in this group as IT products often allow for higher internal efficiencies.

In the maturity phase (C) the companies that do well are the larger institutions that are less effected by the market landscape. These companies are often so big and so diversified that they never see large spikes in any regard. The law of averages keeps them on a steady path. For the entrepreneur this could mean moving away from the “want” areas of your industry and into the “need” areas. What is it that your customers absolutely cannot live without? How can you offer solutions that don’t focus on options but feed into the core need of a person or business.

The time to position yourself or your company for each change is in the preceding phase. This will often be in the growth (B) and decline (E) periods. Some of you run businesses that can be easily tailored to these changes while others of you do not. Service based organizations can alter their packages to offer a better angle on the market whereas product oriented businesses may need to diversify their product line. Again, your specific industry and circumstance will need to be taken into consideration.

Other Cycles

Cycles are everywhere and if you are aware of them you can often profit greatly. Annual cycles that affect many industries are often tied to the weather. Construction for example often slows in the winter because of the snow fall in cooler climates. The warmth of summer is also a catalyst for the soft serve beverage establishments. In fact, because I live in a 4 season area I decided against opening a self-serve yogurt shop in 2008. I watched a few similar establishments go under because they couldn’t carry an overhead through the winter months. If I were to have moved forward I would have had to offer more than frozen yogurt and I didn’t want to go down that path.

It would also be advisable to change your buying habits such that you purchase items in their off season. I haven’t tried the following but I have often wondered how much money one could make if they simply purchased lawnmowers in the winter from Craigslist and sold them in the summer. The same could be done for snow blowers, picking them up in the summer and liquidating them in the winter. Doing this would exploit the cyclical nature of the demand that follows the weather. Of course this would require you to hold the items for half a year or so but I think it could pay off.

Out of phase

As Warren puts it; “You should be fearful when others are greedy and be greedy when others are fearful.” This phrase speaks to the idea of setting yourself apart from the rest and positioning yourself for the effects of group think. You want to stay out of phase with what the majority of people are doing. Staying ahead of the curve often means not adopting what everyone else has adopted. Find a unique angle and go with it, don’t model your approach after the market you will be lost in the masses.

The dynamics we are talking about also hold true on the business to business level. Companies that sell out to other companies often do so because they plaid into the masses. By playing into what everyone wants you will water your business down until you find yourself in a financial crisis and in need of someone to bail you out. Pricing wars can quickly lead to this. If a competitor is selling a product for less than what you can make it for you are either in the wrong industry or your competitor won’t be in business long. Dropping your price to meet theirs will only lead them to do the same and ultimately lower the expectation in the customer’s mind of the price for your product or service. This is one of the reasons why I tell all small business owners never to compete on price.

Conclusion

Play your own game. Take the cycles of your industry into account but don’t allow them to shape your business. Just because your customers want to pay less doesn’t mean you need to lower your price. There are many creative ways to meet the coming changes but you will need to step outside of what everyone is telling you and find a unique position that has not yet been exploited.