Turn Low-Cost Structure into a Competitive Advantage

Penny-pinch your way to success

One of the most important traits for business success is being cheap! In almost any business, keeping your cost structure just a couple of percentage points lower than that of your competition can have a huge competitive advantage.

When you’re starting a small business with no money, you learn how to be cheap very quickly. But as your business gets larger and more successful, it’s easy to loosen the purse strings and not watch each expense so carefully.

Also, as you hire people, it becomes a challenge to get them to adapt the same frugal mindset that you acquired by skimping along in the early days of your business.

Big companies are getting cheaper, too

If you think being cheap is just for small companies, you better think again. More and more larger corporations are using cost control as a competitive weapon.

For example, in New England, almost every large regional discount department store chain has gone bankrupt. And who took market share?

Super-efficient, low-margin operators such as Walmart and Costco. Talk about cost advantages! The general and administrative costs at one of these large, troubled regional discounters were 27 percent of sales. Walmart’s is 15 percent.

This cost differential alone can explain the difference between spectacular success and spectacular bankruptcy! Walmart’s costs aren’t just lower because they’re bigger.

They’re lower because Walmart founder Sam Walton was the cheapest CEO in America — and by no coincidence, also the richest.

Even when Walmart was a fraction of the size of its competitors, so were its costs. Even when he was making millions of dollars, his corporate headquarters looked like a dumpy garage!

Cut your costs with one phone call

Al Dunlop, known as “chainsaw Al” by some of his detractors for the massive layoffs he instituted, led an incredible turnaround at Scott Paper by selling off major divisions, repositioning the remaining product lines, creating new marketing strategies, and reviewing every single cost with a fine-tooth comb.

But when you read his autobiography, Mean Business (which the armchair book reviewers did not appreciate as much as I did), he singles out one phone call that made more difference at Scott Paper than any other action.

In this call, Al cut the single biggest cost dramatically: the cost of paper. He didn’t just put the paper cost out to bid. Instead, he demanded an unheard-of low price and then offered to give all of his business to the vendor who would meet that price.

Another key lesson here is that Dunlop really focused on a cost that mattered — a recurring cost, and a big one. Yes, it’s nice to control one-time, unusual expenses, but if you can take down your big, everyday items — that’s what really matters!

Save your money and rent a dump

Being cheap isn’t just a method for looking at every cost. It’s also a mindset. I remember hearing a man talk about a business he was going to start.

“I’m going to do everything right. I’m going to get the best equipment, the best location, the best furniture, the best of everything” . . . and he’s probably had the best bankruptcy, too!

I once went to a bankruptcy auction at an incredibly lavish office complex. There were original paintings on the walls, built-in multimedia screens, and skylights — the whole nine yards. I filled up a truck with beautiful furniture that I paid just about nothing for.

During the auction, a lot of us were wondering what kind of firm this was. It turned out that it was a consulting firm, and one of my business school professors had been Chairman Emeritus. Lots of brains in a business can help you get ahead, but a cheap mindset can keep you out of bankruptcy.

Growth breeds wasteful spending

Even as my book publishing company grew to a few dozen or so employees, I saw an attitude of complacency to costs growing along with it, and I can fully appreciate how large corporations can get pulled into wasting money needlessly.

For example, I heard people saying things like, “A corporation of our size needs to look like this,” or “We ought to be doing that.” When you hear this kind of talk, you can bet that someone is trying to justify something that has no justification.

Another explanation for needless expenditures that amazes me goes something like this: “Well, we spent $3,000 on company sweatshirts, so I figured $200 for a subscription to a newsletter is a drop in the bucket.”

One day, I found my marketing people had become almost totally focused on conveying the right corporate image in our trade ads as opposed to trying to sell product. Again, the explanation was that, at our growing size, we shouldn’t be so concerned anymore with directly generating sales!

So look around, and don’t be afraid to try to trim some of the larger recurring expenses, especially the things that everyone else says you can’t possibly trim any further!

Mr. Cheap’s Book Series

It’s more than a coincidence that when I entered the market for local city guidebooks, I decided to go for the low end under the brand name Mr. Cheap’s. In fact, many of the Mr. Cheap’s books became best sellers in their local markets.

So why not jump on the cheap bandwagon and join me in penny-pinching your way to success?

Takeaways You Can Use

• Being cheap can be a decisive competitive advantage.
• Put extra focus on ongoing expenses. Do so by closely watching your business bank account.
• The more a company grows, the more difficult it is to rein in costs.

Bob Adams is a Harvard MBA serial entrepreneur. He has started over a dozen businesses, including one that he launched with $1500 and sold for $40 million. He has written 17 books and created 52 online courses for entrepreneurs. Bob also founded BusinessTown, the go-to learning platform for starting and running a business.