Effective cost cutting can be the difference between staying in business and going bankrupt. So, where do you start?
You should NOT start by cutting advertising or marketing expenses if your customer acquisition cost (CAC) is less than 30% of your annual gross profit per customer (AGPC). If you don’t know if your CAC is less than 30% of AGPC, then you need to measure that.
You can calculate CAC by dividing the total amount of money you spend on advertising in a month by the total number of new customers that you acquire in that month through advertising. So, for example, if you spend $3000 on Facebook ads in a month and get 10 new customers, then your CAC is $3000 / 10 = $300.
If each of those customers signs up for a subscription that costs $100 per month, then your AGCP is 12 x $100 = $1,200. That means your CAC ($300) is just 25% of your AGCP ($1,200). That’s good! Don’t stop spending money on those Facebook ads or else your cost cutting will start killing your business!
On the other hand, suppose each customer only signed up for a $29/month subscription. Then your AGPC would only be 12 x $29 = $348, and your CAC ($300) would make up a whopping 86% of your AGPC. That’s not very good, and you should probably cut that Facebook ad spend.
Beyond cutting unprofitable advertising spend, here are several additional ways you can cut costs in your business:
1. Shop around for insurance
Businesses often carry a variety of different types of insurance. General liability insurance, errors & omissions (E&O) insurance, commercial property insurance, vehicle insurance, malpractice insurance, workers’ compensation insurance, cyber insurance, etc. By shopping around, you may be able to find equivalent insurance coverage that costs significantly less. This cost cutting strategy is most effective for high liability businesses such as:
- Construction companies
- Roofing contractors
- Surgery centers
- Tow truck companies
- Apartment complexes
- Medical practices
However, many other businesses including retail stores can often save thousands of dollars per year.
2. Automate as much as possible
Almost every business has repetitive tasks than can be partially or completely automated, saving time and therefore payroll expense (or freeing up that time for getting more business).
Here are some common examples of tasks that can be automated:
- Email marketing campaigns
- Data entry
- Social media posting
- Cold email outreach
- Invoice processing
- Customer service request routing
- Syncing data (possibly using Zapier) between CRM, Quickbooks, ERP, practice management systems, project management software, calendar, and/or any other software tools used by the company.
3. Optimize staffing
Do you have a general manager who spends half their time doing front desk work that you could hire someone for minimum wage to do? Do you have a marketing manager on your payroll who costs twice as much as hiring an agency while only giving you half the performance of one? Do you have a customer service employee who costs 5 times as much as hiring a customer service employee from the Philippines? Those are opportunities for cost cutting.
In general, ask yourself this question: Can some of the work being done by your highly paid employees be done just as well by lower paid employees?
If so, cut back on the hours of the higher paid employees or let them go altogether and increase the hours of lower paid employees who can do the same work (or hire more lower paid employees to cover the work). In some instances, you may even be able to replace full-time employees in the United States with more qualified full-time employees in the Philippines or Columbia. This works especially well for staff working in low-level backoffice support roles such as phone customer support or executive assistance.
However, cutting employee costs should be done carefully. Here are some common mistakes business owners make when cutting payroll:
- They cut hours for all employees. Instead, they should cut hours for their least productive employees while maintaining or increasing the hours of their best employees. If you don’t know which employees are most productive, start by measuring that (measuring isn’t as hard as you may think).
- They cut hours for hourly employees but don’t cut salaried employees. Most businesses pay much more to their salaried employees. If a business has a single salaried employee who isn’t necessary, that usually represents $30,000 at minimum of annual expense that can be cut.
If you’d like help figuring out how to cut costs without damaging your business, send me a message through the form below.