What the new economic environment means for B2B product leaders
This is a guest post from Carlos Ganoza. Carlos is currently a Principal Product Manager at Wonolo. He previously co-founded Quantum Talent, after being Chief of Staff at the Peruvian Ministry of Finance. Carlos is an economist at heart and has thought deeply about what the current economic climate means for product leaders.
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You wake up with the news that your largest customer canceled its subscription, or that free trial sign-ups for your product have fallen dramatically vs the previous month. Welcome to the new economic environment. Things have changed, the economy is much more volatile and uncertain, and product leaders need to be mindful and alert about how those changes affect their users behavior so they can adapt successfully. In B2B that means understanding how companies are adapting to changes in macro variables like demand, inflation, supply chain constraints, etc, and how those factors are evolving.
While the risk of a recession is on everyone’s mind, there is another macro trend that arguably could be even more impactful for B2B products: the change in demand patterns that the US economy has been experiencing since the start of the pandemic. To understand how this affects user behavior and product strategy, let's first take a closer look at how the composition of consumer demand has been changing during the pandemic.
A not so subtle, and fundamental shift
During most of the pandemic demand for goods grew massively as people bought stuff online without leaving home. That propelled the whole e-commerce value chain, from accelerating investments in online shopping applications to increasing employment in warehousing and logistics.
On the contrary, as people limited their contact with other people demand for services plummeted and so did employment in the service sector.
You can see the trend in consumption data, as shown in the graphs below:
Graphs produced by Jason Furman and Wilson Powell, published in: https://www.piie.com/blogs/realtime-economic-issues-watch/us-economy-slows-third-quarter-spending-and-business-investment
And also in the employment data:
Graph produced by Carmen Sanchez Cumming and Kathryn Zickuhr, published in: https://equitablegrowth.org/jobs-report-u-s-employment-data-shows-continuing-strong-job-gains-with-employment-in-the-warehousing-and-transportation-industry-well-above-pre-pandemic-levels/
However, as vaccination rates increased and people started feeling safer, and excess demand saturated capacity in the goods sector, consumers began switching their expenditures towards services. You can see that clearly in the consumption data. For instance, the following graph from the Bureau of Economic Analysis shows how in May 2022 consumer spending in almost all categories of goods fell, while the opposite occurred in services (the exception being, of course, gasoline and fuel). A similar pattern can be observed in previous months.
Inflation rates seem to suggest the same reversal. Goods inflation is decelerating, while service inflation is accelerating, as this graph produced by economist Jason Furman shows:
In fact, the surge in investment to increase capacity in the goods sector during 2021 might have proven to be excessive, as companies like Amazon are starting to acknowledge that now they have excess capacity.
And its implications for product strategy
What does all this mean for product leaders? If your product was directly or indirectly riding the wave of sectors with high demand-driven growth, it is very likely that your users’ priorities will change very dramatically. For example, retailers that experienced very accelerated growth during 2020 and 2021 were focused mainly on increasing capacity quickly during that period. To serve all those incoming customer orders, they had to get more creative and innovative, automate tasks that previously were just a nuisance but during the boom became a bottleneck, and experiment with new tech solutions to achieve that. But if you are not expecting that kind of growth anymore, then your attention will turn to other things, probably doing some clean-up and fixing some of the mess you inevitably made when you were desperately trying to scale your operation.
The change in consumer expenditure away from the goods sector and into the service sector means that the concern for capacity will likely follow the same path. For buyers and users of B2B tech products in sectors with excess capacity, that means transitioning from a mindset of expansion and capacity building to one of efficiency and right-sizing. Or, seen from a left brain perspective, shifting from a context in which the driving emotion is greed to one in which it is fear.
As you move forward in these uncertain times, bear in mind that your product strategy most likely has ingrained assumptions that correspond to a different economic environment, with different user behaviors. There are at least three key questions you will have to consider and plan for over the next few months:
How do you make sure your product stays on your users’ top of mind? Can you strengthen your product’s value proposition to make it compelling under the new animal spirits?
To what extent should you adapt your product to your users’ new priorities?
Or should you pivot your product to different users who are now experiencing the same pain points your current users had when you first acquired them?
The new economic environment is altering the behavior of buyers and users of B2B products. To adapt successfully, you must understand these changes and question basic assumptions embedded in your product strategy.