Navigating Economic Contraction

From the desk of
James Murphy
ScienceNavigating Economic Contraction

How we’ve approached “tolerable losses” in building our business through challenging times.  

Many might assume that in contracted economic environments the business strategy would be to reduce as much risk as possible — weather the storm and hope to get through it. I believe in a more risk-tolerant approach. It may sound counterintuitive, but economic contractions often pose meaningful opportunities. “Calculated risk” sounds nice and tidy in hindsight, but we prefer a framework of assessment that navigates uncertainty through the lens of “tolerable loss.” While we don’t know the outcome, is this a loss we can stomach and is the action in alignment with our business objective? Navigating economic contractions can be defining times for building the team, customer base, and organizational capacity. 

First shared as an internal memo to our team in 2022, these are some of our perhaps counter-intuitive positions we’ve taken during times of economic uncertainty:

  • Generosity: Continue with outstanding generosity to existing customers. Make shipping errors right, send a free box to someone who reaches out in tough economic times, etc. We’ll be especially remembered for how we handle issues during the tough times. 
  • Salt is Foundational to Life – And You Can Make it at Home: Health isn’t proprietary. Neither is the LMNT formula. We reaffirm that salting your food is a viable option, as is buying these ingredients in bulk to create electrolyte homebrews. The DIY guide stays at the top of our FAQs. 
  • Those Who Eat Together, Stay Together: Our internal team receives strong investment. We’ve been remote for three years now, and economic contraction is not the time to pull away from each other in the name of financial prudence. Plus, there’s plenty of great things to gather around without breaking the bank. We’ve never been the first-class flights, $1k-per-night hotel crowd anyways.  
  • Invest in Clarity of Action: Prudent allocation of resources is the name of the game. To make these calls, we need clarity. This comes from self-care, maintaining rest, and investing in each others’ trust, communication, and skillsets. Watch out for that knack to keep working as a means for solving an emotional uneasiness; it will eat at your clarity of action.
  • Invest in Ourselves, Partners: In economic uncertainty, people will be hurting from different angles. We have to first help ourselves to help others. Starting and engaging from this place of security, we can genuinely be good partners. Don’t cut everything on the margin — at strategic times, extend that margin. Run an extra show with a health leader who had a sponsor drop them, help the affiliate who lost their job, send a bit of extra product to the wholesale partners who are finding their margins thinning.

Our most memorable experience operating through the lens of tolerable loss came at the outbreak of COVID. We had just registered our largest sales month ever. Now we suddenly found ourselves game planning for a potential 75% loss in revenue. Uncertainty ruled. And amid that uncertainty, we knew we had one core asset that could really make a difference — our product, the best electrolyte drink mix on the market. So we pushed to the brink of “tolerable loss” and began giving it out. For free. Tens, then hundreds, then millions of stick packs to first responders, health care professionals, coaches, teachers, and wholesale partners. We weren’t certain we’d be able to stay in business. But we were certain we were acting in alignment with our principles. Our mission was and is to restore health through hydration, and that moment, as much as any, called for sharing healthy hydration — it called us to Give A Salt.

Judge your tolerable loss against your principles. When your principles are clear, you feel clearer about what you can tolerate losing. What are you willing to sacrifice for? If it “didn’t work” for the business, what do you still feel good about? At the outbreak of COVID, we felt good about the risk we took giving out stick packs, even if it hurt our salable inventory. It was a tolerable loss for us. 

Here are some priorities we’ve oriented around when making these decisions.

  • Flight to Quality, Customer: In high-growth environments, new customer acquisition is easier — we tend to see customers experiment more and be open to trying something new. In more contracted times, customers watch spending more tightly and are slower to try new things. This doesn’t mean they stop shopping — in fact, many of the most durable customer relationships can be built here — but it means they look for quality in a recommendation. On the acquisition side, we strive for a flight to quality in terms of partnerships (podcasts that people especially trust), as well as referrals from friends. We also prioritize retention of existing customers — leveraging generosity to build goodwill for existing customers, instead of discounts that undercut brand equity.
  • Flight to Quality, Team: There are strong opportunities to recruit high-quality teammates in economic contraction; layoffs during these stretches can have more to do with poor business planning than they do with the capabilities of individuals. In addition, companies such as ours with a strong P&L and Balance Sheet, and a healthy workplace culture stand out. There’s an opportunity to weather tough times together that builds resilience. I lean into investing in our team during these times.
  • Simplify-to-Amplify. We run scenario planning in our regular course of business. Annually in Q4, with new product launches, and when the market calls for it. We run scenarios that completely break the model (what if we fell 75%, what if we grew 4x). By doing that, we are forced to simplify our strategy. And even if those scenarios don’t come to fruition, the insights learned in “what if” tend to give us insight into which are our most important tactics to focus on. We then do those. 

Economic contraction poses a meaningful business opportunity, especially if you take risk within a tolerable loss framework. This is some of how we’ve approached it at LMNT. We’ve chosen to navigate contraction with generosity, investing in our team, customers, and partners. We’re on a mission to foster a committed community of health seekers on a no-B.S. rebellion to restore health through hydration. These actions have been in alignment with that objective, and fortunately, they’ve also worked out to propel the business forward. 

As we say on our box, we hope this can do as much for you as it has for us.

Stay Salty!

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