Smart Answers October 23, 2009, 2:00PM EST

To Beat the Recession, Reinvent Your Business

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"When someone goes out for lunch, we don't compete with all the other lunch places around because our customer has already put in an order before leaving their building." While many other bakeries have suffered or closed their doors in 2009, Specialty's "has been staying above water" this year, she says.

The same can be said of Industrial Specialties Manufacturing, a $5 million, 15-employee, Englewood (Colo.) outfit that makes and distributes miniature pneumatic, vacuum, and fluid circuitry components. President James Davis, who purchased the 27-year-old company in 2006, invested in modernizing operations, put its 300-page paper catalog online, and moved into a new facility.

His improvements helped increase sales by 15% in 2008, but by early 2009 things looked dire. Business from longtime automobile and marine clients dropped dramatically, anticipated new orders didn't materialize, and existing contracts were cancelled.

Bleak Outlook

Instead of panicking, Davis started studying trends. When he saw that the health care, medical, and pharmaceutical sectors had not been hit by the economic downturn, he began actively seeking new customers there. He also hired an employee who specializes in making custom parts in small quantities that he knew his competitors couldn't match.

"At the start of 2009, the forecast was pretty bleak. But during the worst of the economic downturn we were holding our own and keeping afloat," Davis says. Recently, orders have risen enough to make him optimistic that his 2009 revenue will at least match 2008's.

Revenues are down by half this year at PacketTrap, a San Francisco software provider, but CEO Steve Goodman says that changing his pricing model and target customer has increased his customer growth and increased his deferred revenue by 400%.

"We are an early-stage Silicon Valley software firm, and we were growing at a pretty good clip, by about 20% a quarter," Goodman says. By third quarter of 2008, however, sales started going south. After the stock market crashed, PacketTrap's customers decided to rein in their IT spending. "Budgets were frozen, projects we had counted on for revenue dried up and even developed deals were not closing," he says.

Belt-Tightening

The company decided to change its pricing model radically, going from selling its remote network monitoring software outright to renting it on a two-year contract basis. And instead of marketing specifically to in-house corporate technology officers, PacketTrap now targets managed service providers, many of whom are entrepreneurs.

"We've decided to go after guys who like to pay monthly as opposed to all up front. It's 1/24th of the cost of buying outright, and in-house IT departments are going away as IT is increasingly being outsourced to firms that can monitor their client's networks remotely," Goodman says.

While the firm had to do substantial belt-tightening during the early part of this year, Goodman says the changes he made as a result of the downturn have provided a silver lining. "Even though our top line revenue is down, our customer growth is up from 20% a quarter to 60%," he says. "This model is scaling way better than anyone expected."

That look-at-the-bright-side attitude may be more widespread than expected. The ThomasNet survey found that 35% of respondents projected growth in 2009 and 75% expect improvement in their business by the second quarter of 2010—or sooner.

Karen E. Klein is a Los Angeles-based writer who covers entrepreneurship and small-business issues.