The stay-or-go test for shrinking markets
Hi Everyone,
Every market shrinks eventually. Print advertising went through it, DVD rentals went through it, and several software categories are going through it right now.
If it happens to yours, you face one big question. Do you stay and compete for the customers that remain, or move toward a different market while you still can? The hard part is that your numbers can look healthy either way.
Today we're walking you through three checks that show which situation you're really in.
Good numbers can hide a shrinking market
Say you won 30% of your deals last year, and this year you're winning 40%. That looks like progress.
But the possible reasons include the following two: Maybe competitors left the market, and their customers are coming to you. Or maybe most buyers stopped buying, and the few deals still out there are the easy ones.
The first reason means the market is consolidating around you, and staying will pay. The second means the market is disappearing, and your win rate will keep improving right up until there's nothing left to win.
The same is true when a competitor shuts down. It can mean their customers are about to become yours. It can also mean they saw the end coming before you did.
Three checks to help keep you safe
Check 1: Why are you losing deals?
Go through the deals you lost in the past six months and sort them into two groups.
- Group one is deals you lost to a competitor.
- Group two is deals where the buyer decided not to buy anything at all.
Losing to competitors is a normal problem, and you can work on it with better pricing or a better pitch. But when more and more deals end with nobody buying, the buyers themselves are leaving the market.
Check 2: Are your existing customers staying?
Take the customers who signed up in the same quarter, say early last year, and count how many are still with you today. Then do the same for the customers who signed in the following quarter, and so on.
If each group stays at roughly the same rate, the customers left in this market are worth competing for. If every new group leaves faster than the one before, the decline has reached your customer base. The same forces that stop new buyers from buying are making your existing customers cancel.
Check 3: Are you buying your wins with discounts?
Compare the deals you're winning now with the ones you won a year ago. Look at the average price and the discounts your team gave to close.
If your win rate went up but your prices came down, the discounts are doing the winning. That can make sense for a quarter or two, but it can't be the plan, because in a shrinking market those prices never recover. If your prices held while you won more deals, you're genuinely taking customers from competitors.
Decide in advance what the numbers must show
There's an emotional trap here. Staying in the market feels like holding your nerve, while walking away feels like a confession that you got it wrong.
So decide before the pressure builds. Sit down with your team, run the three checks, and write down what the numbers must look like in 12 months for staying to make sense.
Then schedule the review for a year out. By then, the conversation is simple, because you agreed in advance what the numbers had to show.
Why you can't wait until it's obvious
Convoy, a US freight company, raised $260 million in 2022 at a $3.8 billion valuation. Then the freight market collapsed. By the time Convoy started looking for a buyer, every likely buyer had the same problem in its own business, and the company shut down in October 2023.
When a shrinking market becomes obvious to you, it's also obvious to everyone who could buy your company or fund your next move. That's what the 12-month review protects you from.
And when the numbers say stay, stay
HubSpot faced a cooling software market in early 2023 and chose to keep investing in its product. Its existing customers kept renewing and spending a little more each year, and by the end of 2023 it had 23% more customers than the year before. The demand was still there, so staying was the right call.
Go deeper
👉 McKinsey: Bubbles pop, downturns stop — read this if you're leaning toward staying; the companies that handled 2008 best ended up more than 150 points of shareholder return ahead of their peers.
👉 MIT Sloan: Most Businesses Should Neither 'Pivot' nor 'Double Down' — read this before you treat stay-or-go as your only two options; most companies do better changing how they deliver than where they compete.
👉 a16z: A Framework for Navigating Down Markets — use this to plan your spending once you've decided to stay.
👉 Lenny's Newsletter: This will make you a better decision-maker | Annie Duke — listen for the part on kill criteria; it's the method behind writing your thresholds down in advance.
Coming up tomorrow
Tomorrow, we'll walk you through building a company cockpit — the one-page view that helps leaders spot trouble early.
That's it for today!
P.S. Is your market growing, flat, or shrinking right now? Reply and let us know.