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Netflix Password Sharing and Your Business

Streaming giant Netflix recently rolled out the bold decision to crack down on password sharing. While controversial with many of its customers, from a business perspective, Netflix felt it had no choice than to act given the rising costs of its content library and the revenue loss from users gaining access to the platform for free by simply sharing a login.

The Netflix decision and the context behind it serves as a great reminder to re-evaluate your own business and its evolving market. While a decision as drastic as that by Netflix may not be in the cards, there are key learnings that could be gained in your business.

First off, each market is unique. It is very unlikely you are competing with Netflix. What is the dynamic of the market you compete in? Do you fully understand it today and where it is headed tomorrow? What are your competitors doing right now? Is there pricing pressure? Is the customer base growing, flat or even declining? Don’t just assume you know. Be proactive and really understand the dynamic. The rate at which markets are evolving is increasing. Even traditionally stable industries are seeing disruption. The proper lens is critical in evaluating any potential changes to the business, whether mundane or more radical.

Whether out of opportunity, or necessity, consider what changes make sense for your business. Inflation continues to be an issue in the economy. The costs to deliver your product or service have increased. Have you increased prices to keep pace? What about your delivery model? Does it allow you to charge a premium? A customer of ours has become known as a premium quality and service provider in its space. As competitors have moved toward volume and price competition, they have been able to command a pricing premium because of their business model. The key is making sure the customer perceives the difference. Ensure that any marketing and branding efforts support this narrative.

Does the delivery model need to be adjusted? There are countless businesses that have added a small tweak to the business model to drive customer stickiness. An engineering firm serving large commercial properties has doubled down on its technical acumen to design complex solutions for its customers. They are serving as a “quarterback” for entire systems, taking the place of multiple providers that then have to coordinate together. This strategy has allowed the business to command higher pricing and improve customer satisfaction. Higher margins and a stickier customer sounds great – it is likely not out of reach for you either.

All customer complaints are not necessarily bad. Complaints provide insights, but also expose opportunity. Brand Strategist Scott Wozniak had a brilliant, yet simple quote about pricing – “if 5% of your customers are not complaining about price, you are doing something wrong”. Notice he did not say all. 5% is still a small number. Don’t be afraid to lose customers. You want the right customer base, not the biggest one. Do you have customers abusing your system or your team? Who are the ones constantly grinding on price? Netflix feels it will be better off after losing customers. You might be too. Short term profit may suffer, but sustainability should be the aim.

Testing is key. Netflix tested this strategy in smaller markets before rolling it out in the U.S. That allowed them to gauge customer response and behavior. You too can test changes, pilot initiatives with certain customers, and study the results.

Bold decisions are necessary, especially in times of economic disruption. Constantly re-evaluate your business, its customers, and how you deliver to them. Disruption is your friend. Seek it, evaluate the options, and evolve. Some competitors will evolve faster, and they likely already are. You don’t have to be left behind.

Mind the Gap

We are now over a quarter into the new year. Like many companies, you may find yourself falling short of plan. That doesn’t mean the budget has all the sudden lost its value. It can be your best friend. This is not the time to panic. We see far too many business owners making reactive decisions to address performance misses, that either don’t have the desired impact or cause longer term damage. Don’t make that mistake. Take these steps instead.

First revisit the assumptions – are there any obvious flaws in hindsight? Where are you relative to the prior year? Was the plan based on repeating past levels of growth. Was the plan too aggressive? What learnings can be gained from this new look?

Once this valuable context is in your hands, a very powerful tool is the gap analysis. Done right, it can be an invaluable decision-making tool and drive improvement in the bottom line. By exploring the current state and understanding the gap to reach the desired state, businesses can take proactive actions in response. While on the surface, this is a very simple concept, the process to generate the right outcomes is critical. Here are a few keys for success:

What is the impact of sales going forward? What costs are directly tied to sales, that will move up and down as sales follow suit? What does the business look like at a lower sales level for the year? Could you accelerate sales at a lower margin? Or are lower margins just a reality for the business? Understanding the impact of sales changes on gross margin dollars is the tip of the spear as the analysis almost always starts at the top and funnels down from there. Could simply generating more sales in the rest of the year realistically get the business back on track? Maybe, but leadership teams can place too much confidence in the “we’ll just sell more strategy”.

Unless very confident, the answer also lies in costs. Understand controllable costs in the business. Costs like hiring, marketing spends, travel and entertainment, costs tied directly to sales, for example, are costs that can be modified to address a portion or all of the identified gap. What costs are controllable in your business? How much do they move the needle? What would the impact be of cutting these costs? If your gap is small, it may not make sense to cut if it risks future growth. It may just mean future planned spend is curtailed. Large gaps would warrant steeper cuts. What is essential is understanding the potential impact on top line, bottom line and future growth, using that lens to evaluate a decision.

Understand your overhead spend. While potentially a subset of controllable costs, overhead warrants its own analysis. How much more sales can your infrastructure support? Do you need to make additional investment to grow? Are you already at an overhead capacity? Planned investment may or may not need to be spent, which can greatly impact the numbers needed to shrink a gap.

The above items are good examples of variables that materially drive outcomes in planning. Set up a forecast framework that allows you to easily manipulate those variables to understand possible outcomes. While daunting on the surface, the simple reality in our experience is there are likely 5-8 categories that are really going to impact results materially. Focus energy and the what ifs there. The goal here is not to get the “new right answer”. The goal is to understand what the business could generate in income if you go down door #1, door #2 or door #3. This will lead to the confidence needed to drive the business forward, even if the performance to date is below expectations.

Perhaps decisions are made to discount product to drive sales, to pause planned investments, to actually cut payroll and marketing or all of the above. It could also mean simply accepting lower results and take the longer view. What are the options in your business to address the gap? With a proper gap analysis, you can confidently answer that question.

Silicon Valley Bank Failure and the Impact on the Small Business Community

Many small business owners are seeing a flurry of headlines. Much has changed in just a handful of days. Silicon Valley Bank, the 16th largest bank in the United States, has failed. While the situation is fluid, what is most important is that we are in a starkly different environment than in 2008. This is not something to be ignored, and for the vast majority of small businesses, the answer right now is diligence and prudent strategy, not panic.

This is not 2008. What led to the failure in this case is more isolated and the federal government has taken some quick steps to shore up the situation. While there still could be other dominoes to fall, the biggest risk appears to be an unchecked psychological panic more than systemic issues.

First, some important background information and key recent developments:

• The FDIC provides a guaranty by insuring deposits up to $250,000 in a given bank. What is critical to note is that the federal government took action over the weekend and ensured that all deposits will be protected at the seized banks (read the press release here). This is a critically important step as customers do not need to fear broader access to liquidity.
• Silicon Valley Bank and Signature Bank, which failed over the weekend, were the 2nd and 3rd largest bank failures in history. That is a headline, but also a little misleading. The overall economy has grown in magnitude since the run of failures in 2008, and banks have consolidated dramatically from over 7,000 in the US in 2008, to under 5,000 today.
• SVB had a liquidity crisis cause its demise. This was due in part to significant exposure in largely one asset class – tech – as those companies struggled recently, they burned through cash (taken out of the bank) and the wave of IPO’s and deals ceased (not putting money back in the bank). Banks make investments in assets with their portfolios – in SVBs case, these assets suffered dramatically in value due to rising interest rates (bonds and treasuries with huge unrealized losses). When customers started pulling cash and the bank could not liquidate these assets for sufficient proceeds, a perfect storm was born – a massive liquidity crunch. Importantly, it did not fail due to bad loans, which is what in large part plagued us in 2008. In many indicators of bank health, SVB was performing fine – it simply did not have liquidity for a run like this – it’s loan portfolio did not crater it, it was access to cash.
• Signature Bank had heavy crypto exposure – details there are still fluid, but again appears localized in nature as a result.
• Morningstar published a watchlist of other banks in similar situations with potential unrealized losses. A bank of concern that was on the watch list – First Republic, was able to shore up its funding, stemming a further spread. Another good sign.

The situation will continue to evolve, so here is what matters short term:

• Do not panic, psychological panic is far more troublesome than systemic issues.
• Revisit your own liquidity position. Do you have enough cash on hand? How do you know?
• We have seen some larger banks reach out to small businesses using fear as a tactic regarding their current bank. It may well be prudent to have cash at multiple banks, but there is no reason to rush out and do so today, this needs to be a strategic move, not one of fear.
• If you have a bank facility renewing in the next 3 to 6 months, talk to your lender as soon as possible to understand where you sit. Tightening lending standards were already occurring, and this could further do so.
• Watch what happens to interest rates. There is widespread expectation now by economists that the Fed may hold off or shrink expected increases. What does this mean for your business?
• On a related note, be vigilant about phishing attempts in the coming days and weeks. There could be increases in vendor payment account change requests as a result of banking relationship changes, so it’s a good idea to take extra precautions to authenticate communications regarding changes to payment accounts.

More to come as things evolve. Stay strong. We will get through this. Grow boldly.

How Well are You Converting to Cash?

Cash is king, nothing new there. In times of economic disruption especially, there are some silent killers relative to cash that every business needs to be on the lookout for and mindful of the potential effects. When we talk about cash conversion, what that means is how well a business is converting inventory (for businesses that have it), and accounts receivable into cash. Do you know how many days on average it takes from the initial outflows for goods, services, payroll, etc. to convert that into positive cash flow? You need the baseline and to also understand what is happening underneath the service. And a critical disruptor to cash conversion we are seeing in the market right now is related to the lengthening of accounts receivable terms. Here is what to know and what to do about it:

  • Accounts receivable is getting stretched for a large number of businesses. We see this particularly from larger customers. Bottom line, in most cases, they have leverage. They write big checks and are material to the business. Understand how much leverage they really have? Are they highly profitable for you? Do they provide ordering visibility that allows you to forecast more accurately? Do you need to withhold further shipments until things are current? Understand the quality of the client overall and assess your response.
  • An often overlooked aspect of A/R management is a structured follow up process. Do you send regular statements and reminders? Automated ones might work, they might not, and for repeat offenders, a little extra care might be warranted. Many times, the squeaky wheel gets the grease, so stay on the radar. Also, go up the chain with the customer if needed. Especially in larger organizations there can be many layers between the buyer and who writes the checks. You may need to involve multiple parties.
  • Inventory terms in a general sense are not improving, as many suppliers are backed up given softening demand. So, the ability to stretch outlays up front is complicated. What can be done is a re-examination of how you are buying. Could you free up a little cash to help blunt the effects of cash tied up in A/R?
  • Understand that your lender may not just lend you more money. Lenders are concerned about macro-economic conditions. We are already seeing tightening in underwriting. Be proactive and have the conversation about the quality of your collateral, your plans to manage the next 12-24 months and have a financial story to tell them. Just be prepared that you likely need multiple levers and sources of cash to pull on, because lenders will see increasing trends as days sales outstanding as a yellow flag. Too many businesses rely too heavily on their lender for cash. An overall strategy is needed.
  • Forecast cash. This is essential. What do you have the cash to do? What kind of reserves do you have, or need? What is the impact of you average customer delaying payment by even three days? If you don’t know the answers to these questions, start today. Having visibility can illuminate problems ahead of time, and then playing with scenarios can guide actions to steady the course.

As we so often talk about, be proactive. Too many businesses take action too late in the game. Know where you stand, have multiple options in your toolkit, and execute. Getting stretched thin on cash is scary. It does not have to stay that way.

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