Business during a recession

Last week I got the latest issue of The New Yorker and, as usual, whenever there's an article by James Surowiecki, I turned to it and read it first. Surowiecki writes well and intelligently on financial and business matters, and this week's article was no exception.

His thesis this time was how businesses behave during a recession and used Kellogg and Post as examples during the Depression during the 30s. In the 20s, both were equally well known for breakfast cereals, but when 1929 hit, Post reined in its expenses to ride out the storm whereas Kellogg increased ad spending and launched Rice Krispies. The result: hardly anyone knows of Post these days whereas Kellogg's is a household name. Even more importantly, perhaps, Kellogg's profits were increasing even during the Depression.

I got to thinking about our industry, especially in these turbulent economic times. The immediate thought is to reduce expenses, especially when it's probable that revenues will decrease too. Ride out the storm, in other words; don't rock the boat. But that's the risk-averse strategy and low risk generally means low rewards. A higher risk strategy could mean much higher rewards, but the downside could be more too. But if everyone else is being risk-averse, there's more of an opportunity to make big if you don't follow the crowd: don't miss the boat.

For us software companies, there's a similar decision to be made in bad economic times. Do you just cut back on ads and conferences and giveaways, and just invest your money in R&D? When the bad times are over (although it can be really difficult to spot this kind of trend at the time), you can revamp your marketing and you'll have a new product to boot. Certainly with tech companies there's more of an opportunity to do "cheap" marketing through social software, but in reality your reach is not that great: it's hard to find new customers through Twitter for example. And, of course, once you determine that the bad times are over, you want to reach new customers immediately. You don't want to spend the time ramping up because, after all, everybody's trying to ramp up at the same time and how do you differentiate yourself? Better to keep yourselves in front, in the face of your current and possible customers throughout.

The same thing goes for competition in a recession. If you are competing against the free and the open source, what do you do? You can either do nothing, or knuckle down and write a competing product that you hope people will stump up money for once it's done, or you become visible right away in your particular open source space and provide help and work out along with the community what the free product lacks. The risk here is that, no matter how you do, you're always going to be too late with too small a product, and will waste resources and time and money. However, if you succeed, because of your visibility and because you've honed your product through your interactions with the community, you'll make out like gangbusters.

In fact, you don't even have to go that far: release a full-featured, but light version of a product for free, and then provide the more in-depth features to solve the advanced scenarios as a paid upgrade. The risk here is that the features you provide with the free version are enough for the vast majority of your customers.

My point here is not that software companies should or should not take risks, but that they should not radically change their outlook just because the rest of the world is in a recession. Software development is not car manufacturing or ship building or any other kind of production of physical goods. Indeed, I'd venture to say that software companies as a whole will continue to do pretty well in a recession because the market for software doesn't really "go away". Indeed I'd argue that other companies will invest more in their software infrastructure during a recession in order to come out of the gate as fast as they can. Sure, they'll be more parsimonious deciding what they need, or critical of what the various software vendors are supplying, or desirous of value for money, but in the end I'd say they will purchase. Take advantage of the recession by targeting your customers and your market!

Oh, and we'll see you at Tech·Ed in a couple of weeks' time: we're in the Exhibit Hall between Intel and HP ;). I wonder how they'll cope.

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