It’s natural to think of costs as necessary and to focus on covering them. But a better plan is to focus on value. (Costs are, ultimately, chosen.)
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By Per Bylund
One of the greatest burdens on entrepreneurs is costs. After all, if costs are not covered by revenues in a timely manner, it is the end of the business. As the business grows, costs grow too. That’s why so many startups fail when they are successful — they outgrow themselves and cannot keep a positive cash flow.
But it is not only entrepreneurs that suffer this burden of ballooning costs. Recently postmaster general Louis DeJoy unveiled a 10-year plan for cutting costs by rolling back consumer services.
The postmaster’s plan is a great example of how not to think about costs in your business. Certainly, one should never accept unnecessary or too high costs and costs should always be kept under control. But entrepreneurs who focus on costs are in real trouble. Costs are not bad — they are means toward an end. Costs should always be justified because they are, ultimately, chosen.
Costs are a choice
It may not seem so, but every cost that burdens a business is a choice. The reason you have costs is that you have decided to offer a product or service — and you concluded it requires assuming those costs. The entrepreneur’s superpower is to facilitate new value. Costs are necessary to produce value, which means value creation justifies cost.
In other words, costs are indirectly chosen by deciding on what you want to produce. And they are directly chosen when considering the alternatives you have when putting together production. Buy a property or rent? Employ personnel or use a staffing firm or outsource the function? Costs are never fixed or mandatory. They are choices.
This means that the costs in any business are but a means to an end. They are or were once justified by their value contribution. Think about that. It means costs that were considered productive may no longer be. And then they should be cut. Why keep paying for means that do not contribute to the end?
This is the problem that mature organizations suffer from: They have plenty of old costs that no longer are justified from a value perspective. The value produced has changed, but the costs of yesteryear remain. Those costs are not reconsidered because they have become a natural part of the business. This is true of most businesses.
As a business grows and gets older, it suffers from legacy costs that are no longer necessary. These firms need to work on their business model and realign their operations with the value proposition.
At the end of the day, what entrepreneurs do is offer value to their customers. But it is that value that makes it worth paying the price for the customer. The entrepreneur’s main problem is to offer value in excess of what other businesses offer, and produce it at costs low enough to be able to charge an attractive price. So value should be the be-all and end-all for any business. Costs are assumed only to produce that value.
When you start a new business, the value to consumers is largely unknown — both to the entrepreneur and the customer. This value can only be imagined by the entrepreneur who produces it. If successful, it is your greatest asset.
Costs are different. They are originally assumed for their value contribution and chosen based on their prices. Those who do not justify costs from a value perspective are, in a sense, “bad” entrepreneurs. This includes mature organizations that suffer from legacy costs that are no longer justified. And they suffer from entrepreneurlessness because they do not reconsider the cost structure.
The postmaster general addresses the deficits in the USPS as a government bureaucrat rather than as an entrepreneur. The plan cuts costs by restricting valuable output, which is exactly upside down. Had USPS been a regular business, the solution would be obvious: First, make sure value is produced; second, reconsider all costs from the perspective of their value contribution.
The lesson for entrepreneurs: Don’t run your business like the postal service.