Don’t Be Cheap: Why The “Let’s Scrimp” Mentality Won’t Work For Business
Entrepreneurs start businesses to build wealth, to create a legacy, and to do something worthwhile. This takes money, which they don’t have to begin with. As a result, many small business owners take the cheap route to entrepreneurship. The cheap route can include anything free to shoddy, which damages their brand and their professional image.
Going cheap might sound like the only way out, but it isn’t. This mentality kills. Here’s how it’s more damaging than you thought.
Money = Money. Business is Like That.
One overarching difference between regular employment and business is the fact that business is a wealth-builder while employment helps you pay bills. In finance, we learn about “Risk-Return Tradeoff” which points to maximum returns gained with maximum risk undertaken. Employment has almost no risk, and hence low and predictable returns. Business, on the other hand, flirts with risk. The more risk you take, the better your returns are.
Risk isn’t free. It costs money. The demands a business makes on itself take their toll. You start off with business setup, registration, buying a domain name, office space, and computer equipment. You then need to hire staff, advertise, and spend on software and whatever else your business needs. Demands are in the form of time as well as money. One of the most obvious is the time you spend thinking of a name for your startup while one that hits you later is checking out reviews for web hosting providers that match the way your site is set up.
All that you spend, including time, effort and money, on your business is your investment, and you ideally want work to earn multiple times this investment.
The starting premise is simple: if you don’t invest, there is virtually no business to run. Even the most inexpensive of the businesses (the kitchen sink or work from home variety) has expenses.
While you don’t have to invest a million dollars regardless of your endeavor, you still have to spend to get your business off the ground. If you don’t pay enough to get the best talent, for instance, you’d make do with the mediocre, and that affects your business in the long run.
Invest to Impress
What you invest in – and what you don’t – says volumes about your business.
You are already driving perceptions straight to your customers’ mind about how you present yourself and your business. Going cheap on basic investments tells customers exactly what they can expect to get from you if they do decide to part with their hard-earned cash. Brochures on cheap quality paper, a website that looks like it belongs to the 90s, office space in an obscure neighborhood, all contribute to what customers perceive. As they go about forming their first impressions, they better see what they like.
You don’t have to go out on a limb to build an identity because it happens over time. All you need is a reasonably good logo, an interactive website, a good brand presence, and oodles of attitude.
You Scrimp, They Scrimp
Historically, there have always been businesses that play by costs and low prices (too many to list). There are others that charge a premium for their brand (think Mercedes) and/or sheer ingenuity of design (the name Ferrari pops up). Then, there are brands that build a reputation over time and then gradually add a premium for ownership (Land Rover comes to mind).
Here’s the thing about brands: If you scrimp on costs and initial investments, not giving a thought to how your customers perceive your business, you’re hurting your own chances to charge high for your services. You might charge for the sake of charging and you might even be able to justify your premium rates but you’d have to work extra hard if the perceptions aren’t doing the initial grunt work for you.
If charging high and making profits is the essence of your business, “looking good” was never this important.
Give Nothing, Feel Nothing
While it certainly isn’t a rule etched in stone, not investing in your business—on corporate identity, branding, basic equipment, and the like—you don’t have much incentive to earn back. Money has a way of motivating us. Investing money into business gives an additional cylinder to fire on, knowing that you’ll have to earn that invested money back.
Draw a balance here. Just because invested money is an another source of motivation doesn’t mean you invest too much, hire people sooner, buy stuff you don’t need, and invest in office space that’s too expensive. Just remember what all programmers know: Garbage In, Garbage Out.
Going Cheap is Habit Forming
By going cheap, you cultivate an anti-customer, pro-business mentality. While being pro-business isn’t bad, being “anti-customer” is unimaginable.
Because you don’t invest money into business, there’s not much incentive to charge high, produce value, and help solve customers’ problems. One of the reasons why some businesses are lethargic and lackadaisical when it comes to customer woes is because they don’t have much to lose (government offices, heavily-funded businesses). Startups, sole-proprietorship firms, and publicly traded businesses on the other hand, have a lot at stake.
The habit that has the potential to slowly gnaw off an establishment is “starting cheap.” Then the businesses will resort to “low price leadership” or “loss leadership” and other “survival tactics” instead of “premium branding.”
If you want to develop a habit, go ahead and pick up an addiction to analyze and take calculated risks.
I want to emphasize again that no part of this post insinuates the need for excessive spending, massaging the entrepreneurial ego, rapid scaling without justification, or biting off more than you can chew.
Investing on a need basis, keeping the cash flow positive, getting in more clients while keeping them happy, and hiring the best talent your money can buy are all smart ways to grow your business. Figure out the best way to spend your precious capital while uncovering new ways to save money, and invest like every dollar counts. Part of entrepreneurial success also depends on financial planning and putting your money to good, entrepreneurial use. Your success depends on it.
What successes/failures have you found while investing or business spending? Please share your lessons with me in the comments below!