In the next recession, some agencies will survive, while others will fail. Are you prepared?
The clock’s ticking. The 11 U.S. recessions since 1945 have happened about every five years… and it’s now over a decade since the last one ended. [Last updated: June 2022]
Averages aren’t a guarantee, of course, but it’s dangerous to take chances about something that could put you out of business… or at least require some painful decisions.
Fortunately, you can take concrete steps today to make your agency more recession-resistant. Here’s what I recommend to help you survive… or potentially even thrive as your competition struggles.
Beyond the Specific Steps: Mindset and Inspiration
To organize everything you do as an agency leader, consider:
- Focus on what you can control, while finding a way to accept what you can’t control. The second part is easier said than done; consider getting support from a therapist or other advisor.
- Stay true to your values, as you make difficult decisions. Making a decision is usually better than doing nothing. You can’t guarantee success, but it’s a lot better when you lead authentically—based on your Values, Goals, and Resources (VGR) and/or your Mission, Vision, and Values.
- Prioritize inspiration and concrete action. That is, inspire your team about the potential of a brighter future, and give everyone a job to do to help you get there.
Now, let’s look at concrete steps to include in your plan.
Recession Preparation: 5 Steps
If I were leading your agency, here’s where I’d focus:
1. Fix any Client Concentration problems.
2. Solidify your “staple” services.
3. Diversify your lead-gen sources.
4. Build your cash reserves.
5. Create a “worst-case” financial plan.
This isn’t a fun topic, but you’ll be glad you started taking action today… before it’s too late. And if you realize you’re already in a recession? Taking action sooner is better than later.
Let’s take a closer look at my recession preparation tips.
1. Fix any Client Concentration problems.
Do you have a Client Concentration problem? You’re at risk if you get more than 20% of your business annually from a single client.
If your “gorilla” client quits, it can put you out of business. And if they don’t quit, they soak up your team’s time without sufficient compensation… making it even harder to onboard replacement clients.
To fix this, diversify your revenue base. Ultimately, this is about building revenue from other clients—landing new accounts and upselling existing accounts—so the enormous client’s percentage drops to 20% or less.
Depending on your current degree of Client Concentration, this could take a year or several years to fix—so start now, before your prospective clients start panicking. As the COVID-19 panic started, most agencies saw dried-up pipelines for several months… but then a year later, they saw a surge in business.
2. Solidify your “staple” services.
Do you offer primarily “staple” services (e.g., lead-gen, marketing automation, and sales enablement) that clients are unlikely to cut? Or do you focus on “nice-to-have” services (e.g., branding, virtual reality, and public relations) that clients are likely to cut first?
I’m not saying you shouldn’t offer things like AI/VR/AR altogether… but unless your client base sees them as “must-have” expenses, they’ll be the first to get cut in a downturn.
In contrast, “staple” services are much “closer to revenue.” Even if clients reduce their budget, they are unlikely to cut those services 100%. Why? Because the client can easily see how things like lead-gen and sales enablement help them produce revenues.
Web design & development are somewhere in the middle on the “staple vs. nice-to-have” continuum. When a recession hits, some clients will continue to make incremental updates—but many will defer the big redesign for a year or two.
Want to expand your “staple” services, just in case? See my guide to adding new services.
3. Diversify your lead-gen sources.
How diversified are your own lead-gen sources? You don’t want to become overly dependent on any one source—and that includes referral partners.
- Review your active clients from the past 12 months. Where did they come from?
- Then, look at a subset—your new clients from the past 12 months. What’s different about your newest clients?
You’ll have to judge for yourself whether your lead-gen is at risk when the next recession hits. But if you get more than 20% of your new clients from a single person or company (for instance, a software vendor or a partner agency), you’re rolling the dice.
This includes lead-gen channels, too. If you get 90% of your agency’s leads from PPC campaigns, what happens to your pipeline if, for some reason, cost per acquisition (CPA) skyrockets? Agencies aren’t exactly reporting a long-term drop in digital advertising rates.
In a recession, the marketing you’ve done between now and then will help cement your reputation as a go-to agency. When clients are scared, they’re more likely to hire the “safe” choice; your marketing helps demonstrate your trustworthy expertise.
4. Build your cash reserves.
Have you built your cash reserves? Ideally, you have at least 3 months of expenses (and preferably 6-12 months of expenses, to be more conservative)—outside of what’s in your business checking account.
Are your cash reserves below 6-12 months of expenses? You’re not alone. But if and when the next recession hits, low-cash agencies will be doing layoffs sooner.
An extra month or two of cash may mean you can keep your great team together through the next recession. Or as your competitors struggle, perhaps the cash means you can confidently hire the amazing employee who declined your previous job offer… but just got laid-off from the other agency.
Remember that the “months of cash” reflects runway if revenue dropped 100%, to zero. More realistically, a “month” of cash can help you extend things 2-5 months, depending on your situation. After all, you’ll likely also cut expenses. Speaking of that…
5. Create a “worst-case” financial plan.
Have you and your CFO created a “worst case” financial plan? It’s not fun—but it’s less stressful now than when you’re in emergency mode and you’re having trouble thinking straight.
The Revenue Side: Plan B (and Plan C)
On the revenue side, update your “Plan B” (and “Plan C”) revenue plans. That is, what are your revenue targets if there’s a small drop (Plan B)… or a large drop (Plan C)?
The need for your services likely won’t disappear completely—but expect smaller budgets, longer sales cycles, and shorter retainer commitments. What if today’s most-skittish prospects suddenly became your only prospects?
The Expense Side: Cost-Cutting Tiers
On the expense side of recession preparation, define what I call strategic “cost-cutting tiers.” Here’s what goes in each expense tier:
- Tier 1 cuts: What would you cut first? These are typically annoying, but they rarely hurt—they were largely invisible to your employees and your clients.
- Tier 2 cuts: If you need to keep cutting, what would you cut next? Now it’s emotional—it’s time to lay-off the lowest performer or two, and the cuts are no longer invisible.
- Tier 3 cuts: What do you need to cut to avoid going out of business? Given the usual cost structure of agencies, that unfortunately means significant team layoffs. These cuts are wrenching—but if you don’t make these cuts, you’ll need to shut down the agency.
In this article, I share more—including examples of what to include in each of the three cost-cutting tiers.
Ultimately, the goal with the three tiers is to extend your financial “runway” in a phased way—so you don’t suddenly realize you need to shut down tomorrow because you’re out of cash.
Next Steps: Preparing Your Agency
I realize these aren’t things you want to contemplate. But I’d rather you make a plan now, before the recession—because by the time you go into “panic mode,” it may be too late for you to recover.
If you need specific advice, consider instantly booking a Bite-Size Consulting call to get my help.
Question: What’s on your agency’s recession preparation list?
