Who Gets Paid Less When Companies Cut Costs?

Tuesday, February 16, 2016

The key to long-term profitability is to maximize the spread between revenue and costs. The larger the difference, the larger the profit.

I usually suggest focusing on increasing revenue, because revenue has no limit. It's not impossible for firms to earn ten, one hundred, or even one thousand times more income than in the previous time period. Costs, on the other hand, are bounded at the bottom end. It's quite difficult to ever reduce costs by more than 100%.

There's another reason why I don't suggest focusing on decreasing costs. It often leads to a long-term weakening of the firm. Nevertheless, many managers love to cut costs in the name of efficiency.

Today we'll take a look at some traits of parties who are most likely to be hurt in the midst of cost cutting efforts. Please understand, I merely seek to identify traits of those who are likely to be adversely affected. I make no claims that these traits should be used by decision makers.

Of course, there's one place that should never be cut: pricing. Even a small nudge in the right direction can have outsized returns on your balance sheet. You can contact me for a consultation, or buy a copy of the best book on software pricing.