Coming out of the pandemic, it’s easy to consider cutting costs. Or, you might think that in order to attract clients, you need to reduce prices. Deciding to cut costs is never an easy decision, but it can be done for many good reasons. Maybe you are hoping to improve your financial performance, serve your customers better, or increase your ability to price your services or products more competitively.
No matter what your reason, know the difference cost-cutting that can help your business compared to cost-cutting that can hurt your business.
Beneficial Cost Cutting
If you can find ways to reduce your costs while maintaining or improving your quality, it should be an easy decision. It is important to cut costs in places where there are substantial savings.
Be sure you are paying the “right” price for the services or products you are receiving, based on industry research. If you can save money without impacting your customer negatively, you are creating greater value for everyone.
Look at the big picture and focus on how any cost-cutting you do may impact your employee or customer satisfaction and loyalty.
For example, maybe you can get the same quality inputs for your product and by buying in volume, you might save a bit of money.
Detrimental Cost Cutting
Anytime you start cutting costs you send a message to employees and customers, so you want to be sure you are comfortable with what that message is.
In my frequent travels, I have experienced the way two different hotel chains motivated their employees to increase their profits and have felt the message they were sending with their efforts. I noticed this in their concierge lounges, and this was pre-Covid.
At one hotel brand, I encountered empty trays of appetizers during happy hour. When I inquired about this, the concierge told me that she gets a bonus for cutting costs, so she only puts out a little bit of food at a time.
At the second hotel lounge, the concierge told me that she gets a bonus for each positive review they receive from a satisfied guest. This encourages her to perform her job in a way that creates a high level of service for the hotel’s customers. The lounge was well stocked and had a welcoming, comfortable atmosphere.
While the first hotel brand may have been cutting their costs by saving on food, they were doing it at the expense of their guest’s satisfaction, sending the message that they didn’t value customer loyalty. If given a choice, I would not have returned to that property. It wasn’t about the lack of food in the concierge lounge. Rather, they were communicating a message that said that cost-savings at the expense of customer experience was acceptable.
The second hotel chain chose to focus on loyalty and repeat engagement over costs. They sent the message that they measure their success by how many satisfied customers they have, and not just by how much money they can save.
Another negative example of cost-cutting comes from a restaurant group near my home. Over the years their business began to decrease, so they started cutting staff. Then I started noticing they were cutting portions and raising the prices. The quality also began to suffer. Instead of figuring out why they weren’t attracting customers, they tried to cut costs and increase prices in order to achieve their financial goals.
When I brought these issues up with the manager he explained that he had tried to tell management that these changes were having a negative impact, but that all they were focused on was cost-cutting. Instead of asking customers what is and isn’t working and what might attract new business, they were trying to extract more money from each member of a declining customer base. If you keep reducing quality and increasing prices, eventually the remaining clients will leave.
After a while, the restaurant went from one of my favorite places to somewhere we just ignored. When I walked past that location on a Friday night, what used to be a bustling restaurant was now almost empty. Ultimately, the restaurant closed – and this was pre-pandemic.
The lesson here is that you can’t cost-cut your way to prosperity. When you don’t consider the impact that cost-cutting will have on your customers and employees you are only thinking of the short term benefits, and run the risk of having poor results long term
How To Cut Costs Effectively
When you see a decline in revenue, it is normal to begin to think about cutting costs. If you do decide to go down this path, be careful about the message you are sending to your customers and employees.
Center your efforts on where you can save money and maintain your quality. If you get too hung up on cutting costs at the expense of your employees or customers, you are headed down a dangerous path.
A focus on revenue growth by working on attracting more customers to your business with your quality and service can help decrease the need for significant or drastic cost-cutting. Top performing companies rarely compete to be the lowest price point. Rather, they seek to be the company OF CHOICE for their customers.
When you focus on delivering extraordinary value, the loyalty you build with your customers and employees will help you succeed.
Share Your Story
Has cost cutting ever impacted you? Tell me about it in the comments.