The two words "cost-cutting" can fill small business owners with dread. Most firms begin by reducing their marketing activity and downgrading their product or service. But this is a mistake, argues Amanda Walker. Instead, you should use your market intelligence to identify areas where you can cut costs without losing the aspects of your product or service that your customer values most
Marketing is all about maximising profitability. As a small business owner, you will have thought carefully about how to get the most from your marketing budget - probably by targeting the customers most likely to help you meet your sales objectives. But have you ever considered whether you are truly maximising the profit potential of your product or service?
Bear in mind customers will usually buy your offer, rather than someone else's, for just one or two reasons - in food, it is normally about taste; in services, it might be about convenience or value. Providing you can continue to deliver in those key areas, you can cut costs in others.
Know your customers
Take the example of a simple frozen oven chip. Why does someone buy one brand of oven chip over another? They'll probably tell that it's because of the taste. So what elements of the chip don't add to the taste? Does its length matter, for example? Or its 'chunkiness'? These are both elements of the chip that will add to its production costs - perhaps unnecessarily.
In terms of taste, if you were to coat the chip with a little less oil, would it still taste as good? Can you remove costs there? It's critical to understand your customer's buying decisions well enough that you can ensure that the money you spend on creating your offer is spent in areas that will actually drive sales. But how can you find this out? That's where smart marketing comes in.
Understanding the cost drivers
When amending your offer for customers, it's important you don't waste time on things that won't reduce your costs. This means you need to really understand the costs that drive your product or service.
Break it down penny by penny, so you can identify the four or five biggest costs in getting your offer to your customers. Why do these four or five things cost what they do? What would they cost if you did things differently? What would happen if you were to reduce the size of your cakes from 30cm to 27cm? Or offer delivery in 36 hours, rather than 24? Would that save you money? Would you lose customers as a result?
I'd recommend that you make a list of 'theories' about things that could reduce your costs, and your assumptions about why they might work. For example:
- Theory: Making my cakes 27cm wide rather than 30 cm wide will not affect sales.
Assumption: People buy my cakes for the taste, not the size. They are unlikely to be concerned about a small change in size.
- Theory: Using a slightly lower grade of packaging material for my cosmetics will not put customers off.
Assumption: People buy my cosmetics because they make their skin look radiant, not because they have an expensive box. They would be unlikely to care about a difference in packaging material.
- Theory: Reducing my consulting session to 55 minutes, rather than one hour, will not leave customers feeling short-changed.
Assumption: My clients come to me for my expertise, which will not alter. We often spend the last five minutes chatting anyway.
Testing market assumptions
Of course, you can never know how good your theory is until you test it. The next step is to ask your customers to fill out a simple questionnaire about your offer and try out changes based on the results. For example, if your customers don't mention packaging as a reason to buy cosmetics, get your supplier to "mock up" 30 boxes in a cheaper material and test your assumption.
By trying out different changes and measuring the results, you'll find out what your customers really care about when buying your product or service. So, after a few weeks, ask the same customers to fill out the same survey and see if any of the satisfaction scores have altered. If they haven't dropped, make the changes permanent.
Of course, saving costs means an increase to your margins. Or you can invest more in the elements of your offer that you know makes your customers buy from you. What if you were to put some more butter into your cakes to improve the taste? Would you also be able to afford some marketing activity to tell your customers that you have improved the taste - and drive more sales?
All of the above assumes you make reasonable changes to your offer. You might be able to take five minutes off your one-hour consulting session but I'm quite sure your clients would notice if you took 30 minutes off, no matter how good your advice. You must use your common sense along with your understanding of your consumers.
Written by Amanda Walker.