You might have noticed that the global pandemic isn’t doing much for your bottom line. You might also be wondering how you can reduce costs to save your assets—even when the economy is robust and healthy. Today, we offer you the five rules of reducing costs to help you make it through what we will likely call the COVID-19 Recession.
We discussed these five rules on a recent podcast. The rules are as follows:
- Do not think there is one “silver bullet.”
- Do not over-emphasize the easily-measured costs.
- Strive for balance.
- Look at the lifetime value of the customer.
- Select the areas that drive the least value for you.
Let’s take a deeper dive into each of these.
Rule #1: Do not think there is one “silver bullet.”
Clients often tell me that they need a big idea to cut costs. They are looking for one thing they can do, like reducing the call centers or moving the labor force offshore, and other solutions like these. It tells me that deep down, my client thinks that cutting costs can be a single, dramatic action. However, in my experience, which is extensive, I know it’s the sum of many efforts essential to cutting costs. Moreover, a five percent reduction across several different areas is also going to be less painful and traumatic than a single action would be. 
Instead, I would advise taking a lateral look. When I was working in corporate life at British Telecom, and we were looking at reducing costs, I discovered the benefits of taking this approach. For example, the knee-jerk reaction was to adjust our headcount (salaries) to reduce our costs. However, we chose to consider other expenses, like recruitment and training costs and advertising costs. We had much more significant cost savings by including these different areas than if we only considered headcount salary costs. Therefore, if your target was to achieve X amount of savings, thinking laterally is critical.
Rule #2: Do not overemphasize the easily measured costs.
Many people attribute Einstein with a quote that is useful here:
“Not everything that can be counted counts and not everything that counts can be counted.” —Albert Einstein.
When you are looking to cut costs, some things on balance sheets, income statements, or financial records are easy to see (e.g., the salary costs we mentioned in rule 1). Other hidden costs are easy to miss (e.g., the recruitment costs). By making changes that save you some money in the short term, like reducing head counts, you could incur much higher hidden costs in the long-term by accident, like recruitment. So, your overall savings will be less than if you considered all the harder to pinpoint costs. In other words, it would be best to avoid taking a siloed perspective to this exercise and considering even the harder to measure cost areas.
Rule #3: Strive for balance.
I’ve never been involved in a Customer Experience improvement program that has not ended up saving costs. Why? When you are providing a poor experience, there are two forms of expenses. First, there is usually a lot of operational overlap that causes poor experience and increases your costs. Second, there is a lost opportunity cost.
For example, I was running a workshop for a client in the mobile communications market. The VP of customer service was late and came into the workshop after about an hour looking fraught. I asked him what the problem was. He said one of the marketing teams had decided to reduce their costs by bundling a mailer that was going out to all their customers, which numbered around 500,000. The call center was in meltdown. Customers were upset about the fact that they couldn’t get through, which led to loads of angry tweets. And, well…you can probably imagine the rest.
This story is an example of unintended consequences. The marketing department had good intentions. They chose to send the mailer out at once to save costs; it seemed like a good idea. However, that well-intended decision concluded with the call center unable to handle the response.
In another client situation, I spoke with a senior manager at a water utility we were consulting. He had been reviewing a customer complaint. He explained that the process was that complaints start in the call center, and then escalate up the chain until the customer is satisfied with their resolution. In this case, the complaint landed in a big meeting with ten senior managers hashing it out.
“How much was the complaint about?” I asked.
“$1,500.”
“The meeting that you just had cost more than the $1,500, let alone everything else that happened before that,” I said, astonished.
If the water utility had resolved that complaint at the first call with the customer, it would be better off. Moreover, all the stats will tell you that when you deal with a complaint and the customers happy with it, they are more satisfied with a lower monetary amount and have a higher level of loyalty than when they aren’t pleased with the resolution.
It’s a matter of balance. Taking action earlier would have cost less and improved customer satisfaction. Also, empowering the front line employees to make decisions up to a certain amount can drive costs down. For example, employees at Ritz Carlton can give people up to $2,500 to compensate a guest with no questions asked.
Striving for balance emphasizes that you can reduce costs in more ways than to stop doing something. It could be the experience design you implement that improves the process and saves money at the same time.
Rule #4: Look at the lifetime value of the customers.
It is essential to consider the revenue generated by your customers over the lifetime of your relationship. So, not just the revenue over the next year, but several years, maybe even 20 or 30 years. That value is the number it would be best to be mindful of when cutting costs.
You also need to realize how much it costs you when you need to replace customers, i.e., customer acquisition costs. You are likely to lose some customers between the effects of the COVID-19 economic downturn and cost-lowering efforts that could impact the experience. Ensuring that you don’t lose your best customers is critical because their lifetime value and customer acquisition costs are high.
With the Ritz Carlton example, the $2,500 they are authorized to use to satisfy a customer complaint was not pulled out of thin air. That was based on extensive customer lifetime value calculations. Ritz Carlton knows how valuable their customers are to them over the long haul, which drives their decisions. If we were advising Motel 6, we would probably not suggest that they spend $2,500 per customer at the drop of a hat because there’s a different lifetime value calculation.
Think about these long-term relationships, know what your customers’ value is, and incorporate that into your decision-making.
My favorite example of what not to do is cable companies, who have terrible customer service, as I have mentioned more than once. Let’s say you pay them $150 a month for 12 months. Your annual value is $1,800. That is a significant number, but not as significant as your 10-year value of $18,000, or a 20-year value of $36,000. When you consider those long-term values, it should impel the cable company to carefully consider how they treat their customer—especially when you factor in the acquisition and onboarding expenses associated with the service. It would be best to ensure that cost-cutting measures do not drive a customer out after two or three years instead of the natural, longer life cycle most customers have.
Think about these long-term relationships, know what your customers’ value is, and incorporate that into your decision-making. Perhaps most importantly, avoid short-term cost-cutting strategies, especially if it’s going to increase the friction of interacting with your firm marginally. Over multiple interactions, your customers could determine it’s not worth it and go somewhere else, which can be higher than what you saved.
Rule #5: Select the areas that drive the least value for you.
There are parts of your experience that drive value for your customers and other factors that don’t. What you don’t want to do is throw the baby out with the bathwater. In other words, don’t cut your costs and reduce your experience quality in the areas that drive the most value for you now.
I have a story about the milkman that explains what I mean. A few years back, my wife Lorraine used to have the milk delivered daily to the house by the milkman. I told her we should cancel and get our milk at the market like everyone else. She disagreed. Lorraine explained that the milkman, Kevin, came around on Friday to collect money, and they had a friendly chat, and she didn’t want to cancel. Eventually, Kevin moved on, and his replacement decided that he would leave a bill and collect a check on Friday, that we would place under the mat. After a couple of months, Lorraine canceled. She wasn’t getting the laugh and joke anymore, which was what she valued in the experience.
My milkman story illustrates how essential it is that you know what parts of your experience drive the most value for your most valuable customers, so you can make the best possible choices. You need to know your different types of customers and what that group values because it could differ. If you don’t know, then find out. An outside perspective can also help. For example, our consultancy services can help you discover what drives (and destroys) value for your firm and even how to discover what customers want that they might not know themselves.
Even when there isn’t a global pandemic wreaking havoc on the economy, it is essential to reduce your costs. However, it is equally critical to cut costs without driving away customers, which is by all accounts trickier. If you can avoid looking for the silver bullet fix and overemphasizing the easy-to-measure costs while striving for balance in your cost vs. customer satisfaction processes, you are off to an excellent start. Just remember to consider the lifetime value of the customer when you manage customer experiences so that you don’t drive the best ones away. Moreover, ensure that you select the areas that drive the least value for the organization or you could end up driving down costs—and your profits in one fell swoop.
To hear more about this idea in more detail, listen to the complete podcast here.
Colin Shaw is the founder and CEO of Beyond Philosophy, one of the world’s leading Customer experience consultancy & training organizations. Colin is an international author of six bestselling books and an engaging keynote speaker.
Follow Colin Shaw on Twitter @ColinShaw_CX