In a perfect world, customers walk through your business's doors at evenly spaced intervals, precisely timed to make the best use of employees and other resources. As any business owner knows, however, it doesn't work that way.
In the real world, periods of high demand peak at a level well above what staff and systems can easily handle. Quality may suffer, customers may defect and tempers may fray. And, to add insult to injury, what usually follows is a maddening lull during which workers and equipment sit idle while costs mount and profits shrivel.
When the ebb and flow is tied to the calendar, with some months predictably up and others just as reliably down, it’s called seasonality. And, although it happens every year, many seasonal business owners don't know how to handle it properly—losing money and even sometimes their businesses.
How Does Seasonality Work?
Although seasonality is felt to varying degrees by many businesses—such as retailers at the end of the year, hospitality industry in summer, and all the companies those businesses rely on—it’s still not well understood how it works and, more importantly, what to do about it. To help remedy that lack of knowledge, Jeffrey Shields, a University of Southern Maine accounting professor, surveyed small businesses in the state specifically on the topic of seasonality.
One of the most important findings, described in a recent Small Business Institute Journal article Shields co-authored, was that the transition phases between busy seasons and slow seasons were shorter than the periods of high and low sales. That means business owners have relatively little time to adjust inventory, staffing and other budget items for peaks and troughs.
Shields also found that the busy seasons, in particular, can be very short. One of seven surveyed firms reported their peaks lasted a single month. This means they had to generate enough profits during that eye-blink to sustain them the rest of the year.
Seasonality Survival Strategies
When Shields asked business owners how they managed seasonality, some puzzles appeared. In particular, he found businesses neglected to lower prices when demand was low, and raise prices when demand was hot. “They somehow feel it’s an ethical issue, like gouging,” Shields says. “But they’re leaving money on the table.”
Shields was also surprised by how few businesses actually closed down during their slow months, despite the fact that they generated very little in sales while losses piled up. Less than a third of his respondents closed from January through April, which were the months most frequently noted as slowest.
As a busy season approaches, businesses hike inventory purchases, add employee hours and spend more on advertising to spur sales during the phase when business was rising to its peak. Once the rush was on, the strategies businesses were most likely to employ were further building inventory, increasing the hours they were open and setting money aside to tide them through the upcoming off season. While those are valid approaches, Shields says businesses could do more.
Making the Most of Seasonality
Pricing is probably the first place to look for improved seasonality survival. Shields reminds business owners that many companies, such as hotels, have clearly different rates for the busy season and slow season. He suggests business owners be more flexible with pricing to help manage demand and, just as important, improve profits.
A different coping mechanism, which more businesses are doing, is to develop a counter-cyclical revenue source. One good example is a landscaping firm that attaches plows to its trucks during winter and sells snowplowing services.
A hybrid approach is to offer a level pricing model. A landscaper in a warm climate that doesn’t call for snow removal, for instance, could offer customers a flat monthly rate for signing a year-round contract. The customer would pay the same whether crews appeared weekly to mow grass or only monthly to trim trees.
Many business owners Shields studied would dream up events and promotions to boost sales during slack periods. This is a great idea; however, he advises that the return on these initiatives would be better if businesses had pre-set budgets for advertising to remind customers they are around when business is slow.
Seasonality isn’t strictly tied to weather, and it affects many firms that aren’t necessarily seasonal, but serve seasonal industries. The best ways to deal with it aren’t always obvious or intuitive.
One recent study by researchers from Rensselaer Polytechnic University and the University of Texas at Dallas looked at what happened when small movie producers introduced new films during high seasons and low seasons. The movie industry shows strong seasonality, with summer in particular being a period when consumers drawn by big studio advertising flock to theaters for new releases from Hollywood.
The researchers wanted to look at small producers, who can’t afford splashy ad campaigns. They found that it’s generally better to release new films when ticket sales are down and competition for moviegoers is low. A small studio with an already-robust pre-launch advertising budget can gain an average of $270,000 in additional revenues if it launches the product during a low season.
The findings imply that companies would do well to investigate going against the tide. For instance, consumer electronics product introductions, which are heavily concentrated in the year’s final quarter, might do better in other seasons.
Just as demand changes with seasons, seasonality itself may be undergoing changes. The growing number of e-commerce firms may reduce the overall effect of seasonality on the economy. Changes in consumer behavior can also smooth seasonal variations. For instance, today more students go to school year-round, and an aging population of empty-nesters is also more likely to engage in off-season leisure pursuits like travel.
Long-range, Shields suspects that global climate change could significantly affect seasonality, increasing its effects in some ways, reducing it in others, and elsewhere simply shifting the dates of seasonal shifts. That may be especially true in places like Maine, where Shields was just putting away winter clothing a few weeks before summer officially began.
“They say in 50 years we’ll have the kind of weather the Carolinas do,” Shields says. “That’s going to affect some industries adversely and create new opportunities for other industries.”
Read more articles on small-business sales.
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