Managing costs is always challenging, more so when you’re not sure which costs are genuinely excessive and which costs are contributing value.
Combine your need to manage costs with the need to increase revenue and it’s all too easy to lose grip on one for the sake of achieving the other.
To complicate this challenge, digital technologies offer enticing rewards when planned and executed well but can be a considerable drain on resources when they fail.
Our team at Pitcher has been looking at this issue here in the Hunter and across Australia. Our Business Consulting Partner, Dr Richard Shrapnel and Director of Digital Strategy, Assyl Haidar, have some very useful points to make for businesses looking at cost reduction.
In contrast to the typical approach of just reviewing a profit and loss statement to cut expenses, cost reduction needs to be approached in a new way. Businesses should start by identifying the customer value they are trying to deliver. Then, test the alignment that exists between that value, the business strategy and its cost base. The better this alignment, the more efficiently the business will operate.
The goal is to aim for less cost wastage rather than cost reduction.
The impact of digital disruption on every business across all industries means there are two key considerations raised by this approach.
- What impact is technology having on our industry?
- How has this technological change affected the ways in which your business reaches customers and what they expect from the business?
You must first understand the impact of digital on the ‘whole of business’. That is, internal and external considerations. More than 50% of the value created within the digital economy is estimated to come from productivity and efficiency gains, not marketing.
The degree of consumer digital uptake, even over the short span of the last five to seven years, has also fundamentally changed customer expectations around value, quality and delivery. Every business intending to thrive in this environment needs to behave like either a start-up or a turnaround. The digital strategy underpinning this will be one that again puts the customer at the centre and identifies how technology can enable new ways of competing.
Some key signs that indicate a business needs to work on its digital maturity are:
- being slow to innovate or execute
- key reporting that is not timely
- a focus on ‘how we do things’ instead of understanding ‘what customers want’
- being held back by current IT systems which do not talk to each other well or rely on access from a physical location
- an attitude of fear, control or abdication when it comes to technology or social media
- low levels of collaboration and transparency across the business.
While some businesses have recognised the need to adapt their product offering to meet changed consumer needs, few have evolved the channels they use to reach their customers. This includes the approach they take with newer channels such as websites or social media.
In addition to understanding customer needs, businesses must also seek to understand what customers expect from all channels. It can help to break the task into three considerations:
- information (about a business or its products and services)
- access to products or services (range, reviews, specific evaluation)
- payment for products or services.
It is really important to map out the different expectations customers will have in each of these areas when they are engaging with a business online versus offline. You also need to consider the experience for buyers who are just starting to consider you versus those ready to make a purchase.
Some other important business considerations in the context of growing sales include:
- how easy it is for our customers to buy
- determining if sales growth will be achieved by getting new customers, more volume from existing customers or increasing the average transaction value.
The digital strategy employed might include each of the above elements. The important thing is to understand there are multiple ways to achieve the same outcome and each one needs its own prioritised approach.
Growth is driven by understanding why customers are buying.
This requires considering the impact of technology on customer behaviour and expectations. Articulate the customer value and test your strategy and cost base against that value by imagining the business starting over.