Run a tight ship
How to transform your business into a low-cost provider
(Published February 2011)
In January 1877, Cornelius Vanderbilt passed away. The richest man in America at the time, the shipping and railroad magnate’s estate was worth around $105 million — at least $150 billion in today’s dollars. “Commodore” Vanderbilt, as he was known, remains the second-wealthiest American in history. He may even have been the world’s first self-made billionaire.
His secret? It’s simple; he saved on expenditures.
“I have never had any advantage of anybody in running steamships,” Vanderbilt declared in 1869, “but if I could not run a steamship alongside another man and do it as well as he for 20 percent less than it cost him, I would leave the ship.”
Regimented cost-management may not sound exciting in today’s high-speed, whiz-bang world, where innovation and the next new thing tend to garner more attention than the basics. But running a tight ship remains a viable core strategy for many businesses, large and small.
Take Southwest, Geico and Wal-Mart. They’ve based their entire strategy on a low-cost/low-price basis. Why? Because when it comes to air travel, insurance and household goods, price really matters to the target customer. As long as the target customer doesn’t feel she’s giving up much in terms of the experience, she’ll patronize these businesses for the savings—and the lower the prices, the more compelling the value in her eyes.
Businesses like these often aggravate competitors, because their low prices force competitors to justify their own fees. Customers start wondering what benefit they get from paying a higher price. If the higher-priced competitor can’t answer that question persuasively, it won’t be a competitor for long.
But to consistently sell at low prices, a successful business must remain the low-cost operator in its segment; otherwise the low prices become unsustainable. How can you maintain a lower price than your competitors if your costs are as high as theirs?
Low-cost producer status can’t be attained or maintained through minor nips and tucks. To the contrary, it requires a constant, rigorous seriousness of purpose. Examine your entire operation for creating and delivering your products or services to your customers. Look step by step, function by function, and ask yourself if your customers get more value out of each element than it costs you to include it. Distinguish between expenses that drive near-term revenue and those with more distant payoffs. How confident are you that these investments will ever pay off at all?
At Branders, after we took ourselves through this exercise three years ago, we eliminated what had been our largest single division: our Order Management Specialists, or OMS. It wasn’t that our OMS employees weren’t performing their jobs well. What we realized was that the job they were doing was not one our customers valued enough to cover its cost. When we eliminated the OMS role, our customers never missed it.
Warren Buffett’s longtime partner, Charlie Munger, once suggested that the key to success is to, “Take a simple idea and take it seriously.” Transforming your business into the low-cost producer among your competitors is about as simple as ideas come. But it is exceedingly powerful.
And if you’re not trying to offer your customers low prices? Then take out the unnecessary costs and reinvest the extra profits in faster growth — or simply bank it. No business ever failed because it was run as a tight ship. And more than a few have flourished.
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