Cost-Cutting Is Not a Growth Strategy
Cutting costs can inadvertently make your profitability problem worse.
When the economy gets tougher and it becomes more challenging to win business, many entrepreneurs resort to cost-cutting to protect their profits. However, some cost reductions, while well-intentioned, can endanger the very existence of the company whose profit they want to preserve.
Cost reductions —and in that sense, service reductions— broadly fall into two categories:
Cutting services your business no longer uses;
Cutting services that affect the viability of your business.
In which category your cost reduction idea belongs will determine whether your company will be better or worse after the cut.
1: Cutting Services Your Business No Longer Uses
If you can find services you are paying for but no longer use, great. What are you waiting for? Cancel them. I consider them the bloat every company accumulates after years of a booming economy when money is plentiful. Canceling these services won't have any customer-facing or internal impact as you no longer use them. They are low-hanging fruits you can easily get to.
For example, does the number of subscriptions/seats matches the number of employees who need this service? The same applies to your telephone bill or cloud storage. Are you paying for features that are not necessary to run your business?
Eliminating services through efficiencies and process automation is more complex and often requires thorough preparations and some level of investment. However, the benefits to customer satisfaction and lead times can be significant.
For example, implementing client-management software and digitizing your processes can increase customer satisfaction and win you more business as it becomes easier to work with your company. If your cost-cutting ideas aim to reduce bloat or increase efficiencies, go for it. These strategies are healthy for your business and will set it up for growth.
2: Cutting Services That Affect the Viability of Your Business
Every company requires a minimum set of services to operate, like sales and marketing, product development, procurement, supply chain, bookkeeping, payroll, and treasury. Eliminating any of these essential functions will put your company at risk.
For example, companies must maintain systems to produce accurate accounting records to pay the correct tax amount. If you cancel these services believing you can do it yourself or an app can do it for you, once you have missed a filing deadline or failed a tax audit, you may realize that your cost-cutting has gone too far. Often these insights come too late, and fixing these issues can be very costly and far more expensive than if you had continued the service.
Letting go of the only person managing your social media presence will cut communication with your loyal and prospective customers unless you outsource this task to a marketing agency, which may be less expensive than an in-house resource. However, if you cut the marketing agency, too, then what? Can you afford not to do marketing? How does this decision affect the viability of your business in the eyes of your customers? Some of your followers may interpret your decision to stop the daily posts as a sign that your business is in trouble and wouldn't recommend your services to others.
Just because it is easy to eliminate these services doesn't mean you have solved your profitability problem. You may have inadvertently made it worse.
Instead of cutting your cost structure too far and too deep and putting your company at risk, I recommend changing your perspective and thinking about strategies to increase your revenues to afford these essential services. That will also focus you on more constructive thoughts.
Thanks for reading Digitally Explained! Subscribe for free to receive new posts and support my work.