“A really low cost structure gives you plenty of leeway for making errors, which is particularly important if you’re going to make anywhere near as many mistakes as I have!”
Low Costs Allow Room for Mistakes
A really low cost structure is one of the most important competitive weapons a business can have at its disposal. It has certainly been important for me. For years my business was terribly undercapitalized, and I was often testing my bank’s patience. On top of that, I was always making mistakes.
Ad campaigns that didn’t sell, products that the market spit back at us, a customer who one year returned virtually all of its half-million dollars in purchases, even entire business units that failed—you name the mistake, I probably made it, and more than once!
But our low cost structure gave us a lot of leeway for making errors, and it still allowed us to make money and repay our bank loans, more or less when they were due.
Narrowly Focus Your Cost Reviews
It is often possible to develop a cost structure so low that it gives you a giant competitive advantage. How much of an advantage is possible? I’m not thinking just in terms of just a percentage point or two below the industry average; I mean 10 or 15 percentage points below!
From time to time you should carefully examine every single cost you incur. Not all at once—it’s too overwhelming. But instead, review costs in one small part of your business at a time.
Don’t just focus on renegotiating prices or getting more bids. Think about every way possible to reduce the cost or, ideally, eliminate it altogether. You’ll find that if you focus on just one item at a time, you’ll often be able to come up with some really creative solutions.
Running a small company, I never had much purchasing power with vendors, but in hindsight it was probably to my advantage, because I was forced to focus on more creative, and potentially more substantial, ways to reduce costs.
Four Steps to Lower Costs
Here’s a simple four-step process for lowering costs:
- Try to redesign the product or process to eliminate the cost entirely.
- Try to change the specifications to reduce the costs to the vendor supplying the goods or service.
- Try to standardize the specifications or change the delivery schedule to increase volume-buying capability.
- Seek bids and negotiate.
One year in the book industry, paper prices skyrocketed. We tried to eliminate paper altogether by launching electronic products. For books, we changed our paper specifications, typically from 50- to 35-pound paper, saving 30 percent in tonnage. Finally, we began buying paper by the carload and negotiated prices aggressively. You don’t have to be a passive victim of cost increases. There are always alternatives!
Lowering Costs Is Not Just about Negotiating
It’s hard to get other people to shift their cost-control efforts beyond price negotiation. For example, my operations manager used to perennially complain about the increasing price of cardstock, trying to get me ready to accept an increase in his box budget. I knew he was doing a great job negotiating prices, but our costs were still poised to rise, and I don’t like rising costs whatever the reason.
So I pushed him to look for additional solutions, such as reusing more of the boxes that printers used to ship books to us, changing the assortment of boxes we used, and substituting padded envelopes for boxes on smaller shipments.
At the same time, my marketing department was spending more and more money on counter displays—all of which we ship inside cardboard boxes. So I encouraged my marketing and operations managers to get together and design prepacks or self-shippers to eliminate the cost of a separate shipping box.
Prices Are Always Negotiable
Here are a few suggestions that have worked for me in negotiating lower prices:
- Get lots of competing bids for exactly the same specs.
- Set a target price. For example, when buying a yearlong service that had a standard price of $25,000 per month, I told the vendor we’d pay $10,000, period. We saved $180,000 in one year.
- Change the classification. In buying advertising from a huge media corporation that is notorious for not going off their rate card, I nonetheless insisted on a special deal. They got my business by creating a whole new low-rate category for which only our firm qualified.
- Charm the people at the vendor you are buying from—get them on your side to push the decision makers for a lower rate.
- Demonstrate that you will definitely buy now, given a great price.
- Always be prepared to walk if you don’t get exactly the deal you want.
- And if you don’t think prices are negotiable, think about this: I once negotiated down the price of lunch at McDonald’s! They were all out of their small salad, so I convinced the manager to sell me the large salad at the small salad price.
Takeaways You Can Use
- Low costs allow room for mistakes.
- Think creatively beyond getting low bids.
- To really lower costs, try to redesign the process.
- Don’t be afraid to negotiate everything.