Are There Times When Cutting Costs Is a Mistake?

By deejay@aberleenterprises.com (John R. Aberle) | How to Make a Profit

Apr 29

If you’re like most people, the image you have of consultants is of someone who goes around and tells you all the places to cut costs and cut expenses. And that is one type of consultant. I did it for about three and a half years, traveling almost constantly. However, are there times when cutting costs is a mistake?

Cutting Costs graphic

There are three times to avoid cutting costs.

Yes. Have you ever heard of the idea of false economies? It’s a term I use for when people cut a cost or an expense that ends up hurting them. This is partially because there’s a difference between being cheap and being economical. A false economy is where you cut costs in a way that loses you more in your small business profits than you gained by that particular cost cutting.

Three False Economies

There are three false economies that come to mind.

  • ‘Funny Math’

When does 2 x 20 not equal 40? This is true when it comes to people. An experienced 40 year old technician knows things that two 20 year old technicians have not had time to learn about your products, especially the old one. Of course there could be exceptions, including the attitude of the 40 year old. However, I’ve been frustrated numerous times with companies who got rid of the expert I needed so they could save money. Nobody else in that company knew the old printer like he did.

  • An Inexpensive Product that Pulls Additional Business

If you’ve read any of my restaurant reviews on Examiner.com, you know that one of my pet peeves is fountain iced tea or iced tea from concentrate. I like fresh brewed as it has a cleaner flavor without the aftertaste I get with fountain tea. I consider this unbelievably stupid of restaurateurs because fresh brewed iced tea is one of your highest margin products in most restaurants. The trivial savings from going to fountain iced tea can’t be worth the loss in business. Even McDonald’s and Burger King have returned to fresh brewed where I live.

Here’s another example of how this works. My family used to do most of their supermarket shopping at Albertson’s until that chain decided to switch to house brands on many of the products Dorothy and Martha had strong preferences for. The differences were significant enough that they switched to Ralph’s only returning for items that no one other than Albertson’s still carries.

Look at how Southwest Airlines gained a lot of favor when the other airlines started charging for checked bags because they continue to allow you to check your bags free.

  • Cutting Quality

Years ago I read about a really popular seafood restaurant that customers came to from miles around for their chowder, often driving long distances. The new owners decided to save some money by watering down the chowder. Customers began to notice. They generally returned to be sure that it wasn’t just a bad day for the kitchen. Finally, large numbers of them stopped coming.

Are there times when cutting costs is a mistake? In at least these three areas, cutting costs is a mistake. It happens in every business. You definitely need to manage and control your expenses and your costs. What to cut is a business decision. Only you can choose what works for you and for your customers. However, when you cut the quality of your customers’ experience, be prepared for them to vote with their money and shop elsewhere.

You don’t need to become an accountant to figure out how to make a profit by controlling your costs and your expenses. However, you do need good reliable figures. If you don’t have an accounting system you’re happy with I recommend QuickBooks. You might even want to look at QuickBooks Premier for specific industries. And please use if for more than an electronic checkbook.

Helping heart centered businesses be profitable,

John

John R. Aberle, Aberle Enterprises

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