Understanding Recessionary Psychology and Dynamics

April 3, 2008

This is my first in a series of posts about ways for service-oriented professionals (FreshBooks types) to prosper in a down/recessionary market. First things first: you need to understand the market’s dynamics and market momentum. Bear markets, recessions, bad times — they are (usually) preceded by good times, and it’s the good times where things begin to go bad.

Recessionary Psychology

When things are “good” (meaning business is booming), businesses don’t fixate on risk — they become desensitized to it. Human nature tricks people into believing that things will tend to stay as they are today. So when times are good, people tend to believe things will stay that way. Worse yet, people want to believe it — so denial can become a factor. As a result people tend to become overconfident and brazen; survival instincts become dulled.

The trouble is, change is constant — things are always shifting beneath the surface, and markets always cycle given enough time. Therefore when you think things are great, it’s precisely the time to start planning for the bad times.

Recessionary Dynamics

In service-oriented industries — especially in creative industries like film, marketing, etc. — growth leads to hiring because the business model scales with headcount. The growth and hiring is caused by positive things (new customers, increased demand, etc.) and the drive to add staff, in an effort to adequately service and onboard customers and projects, becomes the modus operandi.

Trouble is, growth leads to greater operating inefficiency in people powered organizations. Businesses need more support staff to help enable the contributors who drive the business — and it’s a vicious cycle.

The long and short of it is after a long period of growth starts to draw to a close, and the new work begins to dry up, growth slows, revenue flatlines and organizations are far less efficient than before the growth began.

Obviously there are exceptions to every rule, and this is a generalization, but it’s the experience of most businesses. There is no rocket science here, it’s all a cycle. It’s happened before and it will happen again.

The Writing is On the Wall

During each of my last two trips to NYC I hung out with creative professionals (creative directors, film people, developers, designers) at barcampNYC and at Media Bistro events and some other conferences. People at each of these events were talking about layoffs in their offices. In the bar at the Hilton I could not help but overhear an improtu interview going on. These are the unmistakable signs and it’s late in the game frankly. In my opinion, professional employment in NYC is a leading indicator. People in NYC are wise to the downturn. They’re making plans and you can too.

How to Take Advantage of a Downturn

Now that the table is set and you understand the market dynamics at a high level, we’re good to go with what it means as a creative professional and how you can take advantage of the changing market.

Parting note: never forget change is opportunity.

about the author

Co-Founder & CEO, FreshBooks Mike is the co-founder and CEO of FreshBooks, the world’s #1 cloud accounting software for self-employed professionals. Built in 2003 after he accidentally saved over an invoice, Mike spent 3.5 years growing FreshBooks from his parents’ basement. Since then, over 10 million people have used FreshBooks to save time billing, and collect billions of dollars. A lover of the outdoors, Mike has been bitten so many times it’s rumored he’s the first human to have developed immunity to mosquitoes.