5 Ways to Stimulate Cash Flow in a Downturn
by Eddie Yoon and Christopher Lochhead
HISTORY TEACHES US VALUABLE LESSONS for managing cash during a nasty downturn. Companies that successfully navigated prior crises pursued cash-flow strategies that were both radically generous with customers and partners—and thoughtfully aggressive with near-term revenue and expense management.
These may seem like opposing ideas, but in reality they perfectly balance the empathy required to persuade customers to help while ensuring the economics of the business remain sound.
To achieve this balance, leaders can take five complementary actions:
1. Secure Sales by Taking Risks with Warranties, Guarantees, and Return Policies
Companies can secure near-term revenue by reassuring customers who are navigating a ton of uncertainty. Taking a risk with generous warranties and return policies can both calm nerves and close sales.
Hyundai demonstrated this successfully during the 2008 recession with its Assurance return program. The marketing campaign promised that if you lost your job soon after buying a Hyundai, the company would buy it back from you. Hyundai’s market share grew from 3.1% to 4.3% in the first 10 months of 2009, and its sales grew nearly 24% the following year. It has introduced a similar version of the program during the current crisis.
2. Implement New Revenue and Pricing Models
Companies should test new revenue and pricing models with their most loyal customers, many of whom will jump at the chance to secure goods and services they know they will want and need at a meaningful discount.1 This may require alternative pricing strategies like gift cards and subscriptions, as opposed to traditional transaction-based models.
Blaze Pizza, one of the market leaders in fast-casual pizza, recently launched a #BlazingItForward gift card campaign on social media and via its 2.4-million-member email list. During this promotion, someone who buys a $20 gift card gets a free pizza on their next purchase. Daniela Simpson, general manager of digital growth and head of marketing at Blaze, noted gift card sales have exceeded expectations. Gift cards can be tricky from an accounting and go-to-market standpoint, but note that Starbucks has 25 million mobile users who preload cash onto their rewards cards as an interest-free, negative working capital loan. In aggregate, this provides Starbucks with more than $1 billion in working capital.
Gift cards may seem like a retail-specific idea, but they are a tactic more companies should try. The travel and leisure segment, for example, could offer its best customers a way to secure their elite status for next year by forward-buying travel in bulk at a discount.
Remember that your “superconsumers” have a shared interest in your survival. While the revenue from these methods must be recognized over time, it does have meaningful benefits for your cash flow and balance sheet, as well as for forecasting. If you’re a category or company that has toyed with the idea of migrating to subscription pricing, now is the time to try it. Companies that make the transition to subscription pricing may see their valuation multiples increase once the market stabilizes, given Wall Street’s current affinity for subscription and “X as a service” business models.
3. Accelerate Innovation
Launch near-ready innovations in the pipeline now. Most companies are risk-averse regarding innovation, but just as generosity begets generosity, empathy begets empathy. Customers who typically may nitpick new innovations will be grateful for new and improved products or services—even if they’re released before all the kinks are worked out. Those customers likely will help you identify problems and fix them before a broader rollout.
This is what Tesla is doing effectively with its autopilot software. The software is not finished, but Tesla knows that the best way to improve it is to gather actual data from drivers using it in the wild.
Other companies are simply moving up launch dates to help consumers hungry for distractions. ESPN, for example, accelerated the launch of The Last Dance, its highly anticipated Michael Jordan documentary, from June to April. Many Hollywood studios, on the other hand, are making the mistake of delaying launches to maximize mass market revenue, missing the opportunity to launch their movies as high-priced, pay-per-view events.
4. Cut “Sacred Cow” Marketing Costs
Take a swing at marketing costs that are suspected to not pay back but are too politically difficult to cut during better times. Often these are hard-to-measure marketing costs, or they’re geared toward motivating distributors or channel partners more than consumers.
A good example of this is when, back in 2009, Anheuser-Busch InBev cut a number of sports sponsorships (including Manchester United and exclusivity on the Winter Olympics) that motivated distributors but had little evidence of customer awareness or impact.
5. Engage in New Kinds of Customer Acquisition
Finally, companies should seek to proactively acquire customers during this crisis. One of the best ways to do it is through strategic sampling. This is especially true of companies that sell intellectual property, like software, training, and services, which have low marginal costs. Zoom has generated a lot of attention by offering its services to K-12 education for free.2 These investments enhance its brand over the long term, and may convert people into paying customers six to 12 months down the line.
Another way to drive customer acquisition is via M&A. Valuations are as low as they’ve been in a while, so companies with the means should be aggressively shopping for acquisitions that bring over new customers, cross-selling opportunities, or new business models and categories. Consider the New York Times Company, which just acquired Audm, a subscription-based audio app that offers long-form journalism read aloud by celebrated audiobook narrators.3 Given that print is migrating toward podcasts, this is a great time to make a bet for the future on the cheap.
Companies need to resist the temptation to stay hunkered down on defense during these difficult times. Instead, go on the offense by using radical generosity and thoughtful aggressiveness as guiding principles. Dark times are when legendary companies and leaders are forged.
Originally published April 4, 2020. Reprint H05JEH
Notes
1. Eddie Yoon, Steve Carlotti, and Dennis Moore, “Make Your Best Customers Even Better,” hbr.org, March 1, 2014, https://store.hbr.org/product/make-your-best-customers-even-better/f1403a?sku=F1403A-PDF-ENG.
2. Jordan Novat, “Why Zoom Has Become the Darling of Remote Workers During the COVID-19 Crisis,” cnbc.com, March 21, 2020, https://www.cnbc.com/2020/03/21/why-zoom-has-become-darling-of-remote-workers-amid-covid-19-outbreak.html.
3. Nicholas Quah, “Is The New York Times’ Purchase of Audm a Turning Point in Its New Audio Strategy?” NiemanLab, March 24, 2020, https://www.niemanlab.org/2020/03/is-the-new-york-times-purchase-of-audm-a-turning-point-in-its-new-audio-strategy/.