Introduction:
In our last Business Bite, we explained 5 Strategies to Drive Revenue Growth, and now you’re going to learn 5 Strategies to Cut Costs. Let’s begin by explaining the difference between strategic costs and non-strategic costs.
Strategic costs clearly bring in business and improve bottom line, such as salespeople, advertising that works, and commercializable R&D.
Non-strategic costs are all the other costs, such as admin, managers, rent, software subscriptions, consultants, lawyers, accountants, computers, office supplies, etc.
Great organizations will outspend competitors on strategic costs (as % of revenue) in good times and bad times. This requires intelligence and judgment.
Great organizations will ruthlessly cut non-strategic costs to the bone and require the burden of proof to justify costs. This requires an unwavering suspicion of every single non-strategic cost.
This simple concept, applied with commitment and unwavering resolve, is the most powerful profit-maximizer!
1. Slash Non-Strategic Costs to Free Up Resources for Growth
Cut costs first. Ask questions later. Let’s not keep spending Cost A unless we’re sure that we need that cost. When in doubt, cut more and spend less. The comforting thing about cutting costs is that somebody will always tell you if you make a mistake, and you can add the cost back.
Non-strategic costs, such as administrative expenses, unnecessary tools, unutilized subscriptions, office supplies, or office spaces, are prime candidates for cuts. By ruthlessly trimming these expenses, companies can reallocate funds to areas that directly drive growth, like customer acquisition or product development.
Everyday expense items to cut include first-class travel, other travel, spot-check expense reports, furniture, copiers, office equipment, office supplies, maintenance contracts, subscriptions, telephones, and “contracts” with suppliers.
Pro Tip: Use the Software Subscriptions Audit The Malloy Way™ tool to conduct semi-annual audits of all recurring subscriptions. Cancel any unused tools and renegotiate contracts for must-have ones. You’ll be surprised at how much software bloat you can eliminate. Make it a company-wide competition to find and eliminate wasteful spending!
Bonus Tip: Stop paying for multiple seats for multiple team members in each software. Instead, create one master company account on each software and use a secure password-sharing tool like BitWarden, which only costs $4/user/month to cut costs across many SaaS tools. Malloy Industries does this with our 9 team members to save hundreds of dollars each month on tools like Canva, ChatGPT, Loom, Scribe, Dropbox Sign, ActiveCampaign, and more.
2. Renegotiate Supplier Contracts to Boost Margins
Start cutting costs in the most painless place – suppliers. You can aggressively cut the prices paid to suppliers for goods and services. Here’s how:
- Never let the person who purchased the product/service (your buyer) negotiate the price. They are the worst person in the world to negotiate the price with your suppliers because they have a personal bond with the supplier.
- You need some outside shock to the relationship that forces the supplier to aggressively lower its price. You need someone to be the “heavy.” You need a Cost-Cutting Czar!
- For better negotiations, tie your buyer’s hands. Empower the buyer to accept concessions but not to give any. Apply this rule to all your buying.
Your buyer can say, “I’m sorry, I can’t help it, Mr. Supplier, but our CEO appointed Carl as our Cost-Cutting Czar. Carl says this is the top price I can pay. I don’t think it’s fair, but I can’t help it any more than you can. Do you want our business at this new price, or do you want Carl to call your competitors to do business at the new price?”
B2B SaaS companies rely on many third-party products and services (cloud hosting, SaaS tools, etc.). By renegotiating contracts with suppliers and demanding lower rates, significant savings can be achieved without impacting customer experience or product quality. Consider leveraging bulk discounts or switching to more cost-effective providers.
Pro Tip: Appoint a Cost-Cutting Czar whose sole job is to act as the “heavy” to negotiate and cut costs on all supplier pricing before the end of this quarter.
3. Send This Letter to Your Suppliers
Send a letter to all your suppliers stating that “Times are tough in the current economic and political climate with XYZ market forces… Henceforth, we will accept no price increases. In fact, we require a 3% reduction across the board from all our suppliers. If you cannot cut our costs by 3%, then we will immediately start a competitive bidding process to find the best vendor.”
Make sure the letter comes from the CEO and Cost Cutting Czar.
You’ll be amazed at how many of your suppliers roll back prices 3%.
For those who don’t, when the bill comes, have your buyer or Cost Cutting Czar deduct 3% from the bill and say “Didn’t you read the letter from my CEO? What are you trying to do, get me fired?” Another group of suppliers will give in at this point.
Pro Tip: “No” from a supplier rarely means “no way.” It just means “I’d rather not.” They want to make the sale and care less about the price. Make them truly believe that the sale depends upon lowering the price, and the price will come tumbling down.
4. Optimize Research & Development (R&D) Spending
Ask your R&D team members to divide all their projects and expenses into 5 categories:
- Pure, basic R&D
- New product R&D
- Improvements to existing products
- Process R&D (i.e., R&D to lower the cost of your manufacturing or operations)
- Customer R&D (i.e., work your engineers do with the customer to tailor products to the customer’s needs and applications)
The best, most profitable companies spend a lot more than their competitors on #5 Customer R&D and #4 Process R&D and a lot less on #1 basic R&D.
Focus R&D budgets on projects that directly enhance customer experience or lower operational costs rather than blue-sky innovations. SaaS businesses thrive on customer-driven developments, so investing in process and customer R&D (instead of basic R&D) can accelerate growth while controlling costs.
Pro Tip: Prioritize customer R&D to tailor products to client needs. This boosts satisfaction and retention without inflating R&D budgets. Set a fixed percentage of R&D for profit-driving projects only.
5. Cut Managerial and Administrative Bloat
Many companies grow bloated with middle management and administrative roles that don’t directly contribute to profitability. You can reduce salary expenses by cutting non-essential roles while encouraging a more agile and responsive team culture focused on output rather than oversight.
You can also cut six-figure salaries, bonuses, and benefits and replace them with a fractional executive. Fractional executives literally cost a fraction of their full-time counterparts, and you only pay for the expertise you need when you need it.
Pro Tip: Plan for a 3-5% headcount reduction by removing non-essential roles and/or reducing them to part-time/fractional roles. Shift responsibilities to doers, creating a leaner organization. Consider this your opportunity to embrace agile methodologies beyond software development!
Cut Costs Without Cutting Quality
Cutting costs doesn’t mean cutting corners. Never spend money by accident or routine. Always make the spending of money a difficult process that must jump through several hoops to prove its worthiness.
Here’s one more highly effective means to achieve sure-fire cost reduction: announce that anyone wanting to spend money has to contact you first and ask you personally for your permission. Some employees write concise, convincing arguments for why they need the money, and you can approve those requests. Most people will think twice about asking your permission unless their case is worthy.
By strategically evaluating every expense and optimizing your operations, you can maintain high performance while driving profitability. These smart strategies will help you create a lean, high-performing business without sacrificing the things that matter most.
Ready to Maximize Profit?
By implementing these cost-cutting strategies, you can maintain performance while significantly boosting profitability.
Want to hear how we can help you cut costs and grow your business?
Book a free 30-minute Scalability Audit
P.S. Whenever you’re ready, here’s how we can help:
1) See if a Fractional Executive is right for you to scale your company with top-tier talent on your terms. No pressure to hire, just the chance to talk about your unique situation and interview 2 vetted candidates (plus a third on request) who could help.
2) 1:1 CEO Coaching to lead your company more effectively and work through challenges. Email us if you’re interested because we only have 1 coaching spot open this quarter.
3) Free Entrepreneur Roundtables for entrepreneurs seeking advice at any stage to come in with problems and leave with a new lens to examine their business, helpful DIY resources, and potential solutions. Join me on Wednesdays in October at 4pm ET on Zoom.