With both inflation and recession fears high, many companies are embarking on cost-reduction initiatives. Moreover, the dislocations of the pandemic have changed many customer needs and buying patterns. So much flux may be unnerving but actually creates opportunity for firms to alter business models in ways that both reduce expenses and keep customers delighted. This is a time to look beyond the typical business reaction and use the uncertainty as an advantage.
Cost-cutting and innovation are not diametrically opposing forces
For most companies, the first, and most obvious, initiative in cost conservation is to go through rounds of cuts. While reasonable, making such cuts risks hollowing out core capabilities. In addition, innovation often gets put on hold as companies focus on preservation. But it doesn’t have to be that way. New approaches are needed.
For an example of how to make innovation and cost-cutting allies, look at how Capitec upended assumptions about retail banking. The company removed all cash from branches, and so could do away with security. It configured branches so that tellers could sit alongside customers and look at screens together, in a collaborative manner that enabled cross-sell. It did away with promoting separate accounts, and instead offered a single account for savings, checking, and credit. In doing so, Capitec could charge fees roughly half that of its rivals, and still earn an astonishing 20%+ Return on Equity. By focusing on what their customers really valued, Capitec was able to change traditional banking while stripping away costly overhead. By combining innovation and cost-cutting, what I’ve termed elsewhere Costovation, Capitec created an opportunity to transform an ordinary retail bank, offer low fees, delight customers and increase profits simultaneously.
Capitec’s branches radically re-think the banking experience and also branch operating costs.
When is a company ripe for bringing innovation to costs?
To determine if you have headroom to bring innovation to the cost side of your business, evaluate your current state and look for some of these seven signals:
1. Expensive features: If a significant amount of cost is driven by a handful of features, isolate the features that drive up costs. Cut back or find ways to improve their return on investment.
2. Expensive customers: If a significant amount of expense is driven by a handful of customers, adjust your approach to serve the “expensive” customers more efficiently, or make the strategic decision to focus on other populations.
3. Expensive sales: If a significant amount of expense is in sales, not in the product itself, find daring new ways to circumvent traditional sales channels and innovate the way the offering is sold.
4. Over-standardized products: If output is standardized despite very specialized customer needs, zoom in on the customer subsets that are dissatisfied or under-satisfied with current solutions. They are your foothold to disruptive innovation.
5. Over-standardized sales: If the offering is sold the same way to all customers, identify customer segments whose needs are being underserved or overserved by the traditional sales mechanism. Design a new approach that is tailored to meet their core needs (and does not overshoot them).
6. Cost imbalance: If the revenue for certain activities is not proportional to their costs, stand out in the industry by adjusting pricing to accurately reflect the value being delivered.
7. Contingency creep: If the system is built to cover all conceivable use cases, even those that are rare, pick your battles and focus on what is the most impactful.
Cost-cutting is on many strategic agendas for 2023. As you proceed down that road, reserve a bit of energy to find the big moves. You can significantly lower expenses while continuing to keep customer-focus right in the bullseye.
This piece was written with the assistance of my colleague Angela Perozzi.
