5♠️ What adds value? Customer-centric cost reduction 

Managing costs effectively is essential for long-term profitability. Many businesses find themselves struggling to identify areas where they can reduce expenses without sacrificing quality or customer satisfaction.

Problem or challenge

Identifying unnecessary costs can be difficult, especially when ingrained in your business's operations. Simplistic cost-cutting methods like mantras to ‘Save 10% across everything”, “No new hires” and the like may lead to unintended consequences, such as reduced quality or customer satisfaction.

Complexities

The real answer lies in determining which costs truly add value to your customers and which are simply waste. It requires a shift in mindset from an internal focus to an external one.

Solution

The key to effective cost reduction is to align your cost-cutting efforts with customer value. 

1. Engage with your customers: Conduct surveys, interviews, or focus groups to gather direct feedback from your customers.

2. Identify value drivers: Determine which aspects of your products or services are most important to customers.

3. Analyse costs: Assess the costs associated with each component or feature of your offering.

4. Align costs with value: Identify any costs that do not directly contribute to the value perceived by customers.

5. Implement changes: Make adjustments to your operations to eliminate or reduce unnecessary costs.

Benefits

By implementing this approach, you can:

• Increase profitability: Reduce costs without compromising customer value.

• Enhance customer satisfaction: Focus on delivering what customers truly value.

• Improve efficiency: Streamline operations by eliminating unnecessary activities.

• Gain a competitive advantage: Differentiate your business by offering superior value at a competitive price.

Why it works

The effectiveness of this approach lies in its focus on customer-centricity. By understanding what customers really value, you can make informed decisions about where to allocate resources and eliminate costs that do not contribute to their satisfaction.

Measurement

The impact of your cost reduction efforts can be measured by:

• Reduced costs: Track changes in your overall cost structure over time.

• Improved profitability: Monitor your profit margins and return on investment.

• Enhanced customer satisfaction: Conduct surveys or gather feedback to assess customer satisfaction.

• Increased market share: Evaluate your market share and competitive position.

My story

Sadly and frustratingly economic downturns (the dot com crash of 2001 and the credit crisis of 2007) have twice put me in a position where I’ve had to cut the cost base of the organisation by a third to survive. Not an easy challenge. But in both cases we managed it - through hard work and clear thinking about what mattered to our customers. What activities, and indeed products and services, were valued by customers and which weren’t. 

In neither case did we do a simplistic cut across the board. Yes it was hard work and we had to think very carefully and strategically, but we did it, survived and were able to regroup as a very successful business regaining growth afterwards.