I have two really bad habits: an interest in global politics and economics. Given the global economic downturn, there’s been plenty to read about in both areas.
Recently, I’ve found an interesting subject in the debate over the ‘Cash for Clunkers‘ program in the United States that has encouraged consumers to trade in their gas guzzling automobiles for more fuel efficient ones. Depending on who you listen to, ‘Cash for Clunkers‘ is an example of Keynesian economics working wonders or it’s a wasteful, inefficient government program whose true benefits are overestimated.
In the debate, skeptics frequently make an important point: ‘Cash for Clunkers‘ is merely shifting future demand for new automobiles to today, not stimulating new demand. If one believes this to be a valid argument, which I do, the implication is obvious: the program isn’t stimulating new auto sales, it’s ‘borrowing‘ them from the future.
While this point seems lost on many, the idea that demand can be both created and time-shifted is an important one to pay attention to if you run a business. In the context of a business, long-term sustainability generally requires the stimulation of demand for products and services, either from new customers or existing customers. Running a successful business, however, sometimes calls for the time-shifting of demand to meet immediate goals and manage cash flow.
Hypothetical example: you run a company that licenses a software product to customers. It should go without saying that you need to sell licenses to build a successful business. That means you have to acquire customers. Without customer acquisition, you’re not going anywhere. Once you have a base of customers and have hit a plateau, taking your business to the next level will probably require that you develop new markets. You might do this by adding new products that your existing customers could benefit from or you might do this by finding a new market in which your product has an application. All of this falls under ‘creating demand‘.
Sometimes, however, creating demand isn’t all there is to it. Perhaps, for instance, you have quarterly earnings estimates that need to be hit to secure an additional round of financing from an investor or perhaps you have bills coming due at the end of the month and cash flow is tight. Since you have a short-term need to bring in cash, trying to create new demand is probably not the most expedient approach. So you instead look to time-shift demand. This may entail offering a customer a discount on an early license renewal so that you can book revenue this quarter instead of next. Or it may entail giving an existing customer a sweetheart deal on a product it isn’t already licensing.
In the final analysis, creating demand is all about growing and developing business; time-shifting demand is all about managing and choreographing the business you already have. For business owners, understanding that there’s a difference and knowing when each should be employed is a crucial part of building a company that’s sustainable over the long haul but that doesn’t get lost navigating the short-term obstacles that almost all businesses eventually face.
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