The Fallacy of Cost Savings

When some people talk about cost savings, they are really talking about price reductions. To them, the easiest and fastest way to see an improvement on their Profit & Loss statement is to reduce the actual spending in a category by extracting a price concession. That is, in fact, one way to reduce costs. It is also the most direct way to reduce costs.

The direct way to reduce costs is not very often the best choice when what you cut costs of things that are strategic, and where reducing costs actually takes money out of the outcomes you are trying to improve.

Maybe people are using too many Post-it Notes. Maybe they waste paper. Maybe they are wasting money on things that are unnecessary to the results you are trying to produce. By all means, cut away. But what about spending on things that are strategic, that produce real value, that allow you to compete and win in your space?

For most companies, a greater investment in one line on a Profit & Loss statement can massively reduce another line, generating greater cost reductions than had that supplier reduced their price. One company I know charges 3 times as much for their product than anyone else charges for what is perceived to be the same product with the sales result. Prospective clients are horrified by the idea of adding 3 times the cost to that line on their P&L, especially after bidding work at the lower price. But this company’s product reduces their labor spend by 75-percent, and the cost of labor is their greatest expense.

By spending more on one line, you can drive down costs on other lines. For this to be true, you must be able to justify the delta between your price and the price your prospective client is paying now—and you have to convince them that price and cost are different, and that lowering the price often has the opposite effect of what they’re trying to accomplish.

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