Five Rules for Smart Budget Cuts

Five Rules for Smart Budget Cuts

“Panic causes tunnel vision. Calm acceptance of danger allows us to more easily assess the situation and see the options.”

– Simon Sinek

The coronavirus crisis is truly that—a crisis. It has affected life and work in ways we couldn’t have anticipated, and things will likely never be the same. No matter where you are on the globe, you are feeling the effects of the pandemic, and the uncertainty and speculation has made many people very concerned, and in some cases, panicked.

While these are undoubtedly troubling times, we want to urge everyone to take a deep breath before making drastic cuts in their business based on fear and insecurity.

Before you scale down, ask yourself, what is my plan to scale up?

It’s understandable. In times like these, budget cuts are inevitable. We need to be fiscally responsible and there are real liquidity and cash flow issues that demand urgent attention.

Responsible pruning is never a bad idea. Throughout the recent bull market, we’ve probably all been guilty of spending a little more loosely than we should have, and perhaps we’ve kept underperformers because the labor market was so tight.

But we’re seeing too many companies hit the panic button, making unilateral cuts without thinking strategically: No more hires, advertising, training, contractors, or R&D; cut 25 percent headcount across the board. While that provides some short-term stress relief, it’s also setting up these companies for long-term failure.

Now is the time millionaires and billionaires are made. By no means are we glad we’re in this position—it’s horrible. But those who retreat out of fright will be overshadowed by those who move ahead confidently.

It’s time to take a minute to think about what investments we need to make now, so whenever this crisis is over—and it will be over—we are stronger, leaner, and light-years ahead of our competition.

These are five things to think about.

1. Invest in Your Highest-Value Customer Segments

In unstable times like these, it’s critical to focus relentlessly on the highest-value niches within your customer base (or as we like to call them, your whales). How recently have you segmented your customers into high-, medium-, and low-value buckets? Chances are your top 10 to 20 percent of customers drive 80 percent of your margins.

When we make cuts across the board, we’re harming our relationships with our best clients as much as with our worst ones. Now is the time to be there for your most loyal and enthusiastic fans.

Use your data to take stock of who your best customers are, what problems you solve for them, and how you can do it even better, both in this time of turbulence and in the post-COVID era. To do this correctly, you may need some hires, advertising, training, contractors, and R&D. That’s why it’s so important to avoid blanket statements like “no more advertising.”

Practically speaking, it’s going to be harder to get a stranger’s attention right now (although our next article is about what to do when no one takes your call). Your best bet is to focus on those who already know and love you.

2. Focus on the Relationship, not Revenue

Play the long game. Don’t call your best customers and ask them what else they want to buy right now. Don’t spam your email list with a million offers. Depending on their personal situation, people are feeling a range of emotions—lonely, bored, overwhelmed, anxious, scared. Use this time to be empathetic.

Then be generous with your time and your strengths. Give away your best thinking, offer to be a sounding board, host virtual networking sessions. Help connect people to others who can help. Surprise and delight. View this as an investment.

Continue to send communications to this group of high value customers and prospects. Otherwise, you’ll be out of sight, out of mind—which leaves an opportunity for your competitors to swoop in and gain share.

In maintaining a steady flow of value-add communications, you will definitively build stronger relationships, and who knows, you might accidentally stumble upon novel ideas for new products and services that best serve your whales. Here’s a 10-day challenge: Every day for the next 10 days, call one of your best customers just to catch up and see how they are doing personally. Don’t talk about work or your products.

3. STOP Investing in Your Low-Value Segments

This is the corollary to the first rule. Your bottom 10 to 20 percent of customers (or as we call them, your barnacles) are probably unprofitable. You’re better off getting rid of them, or at least cutting back on targeting them for new business.

For one of our clients, 50 percent of their sales and marketing resources were aimed at their lowest-value customer types. Why not cut this budget and reinvest part of it towards finding more whales, while dropping the rest into your savings bucket?

4. Seize the Day on Lower Digital Acquisition Costs

You can execute all of the above at drastically lower investment levels if you use digital channels.

Everyone is online! According to Facebook, messaging is up 50 percent. Twitter’s daily usage has seen a 23 percent boost. Internet traffic for AT&T customers is up 27 percent. Meanwhile, brands are slashing their digital ad spend (including Amazon, who has drastically reduced Google Ads spend). This shift in both supply and demand has resulted in a 50 percent decline in digital ad rates.

Why not go all-in on communicating with your best customers and prospects? Just remember: You have to be sensitive about your message.

Now is the time to build relationships online. It’s time to accelerate your “digital transformation.”

This goes for any type of business. Even those who are currently closed in-person can use this opportunity to build out their digital footprints. Say you own a fitness club. Why not invest in online workout videos and build a loyal audience? Then, when it’s time to reopen your doors, you have amassed tremendous pent-up demand.

5. Iterate Continuously with Your Team

This is a very fluid situation, which means it’s tough to make decisions. This is unpredictable and unprecedented, so there is no playbook. As leaders, we need to write the playbook in real-time.

The best approach is to get your whole management team working together.

We’ve set up a company Slack channel for new ideas and I encourage everyone to add at least one new idea per day. No filter, just put stuff down. We’ve extended our daily management scrum by 15 minutes to discuss ideas that rise to the top, then we take action!

What are you doing to strategically reduce in some areas while doubling down in others, to ensure you come out of this crisis better for it? Not sure where to start? Shoot me an email and we’ll set up some time to brainstorm together.

About the Sterling Woods Group, LLC

The Sterling Woods Group’s mission is to help clients make sense of their data to predictably grow sales. We apply data science to help you optimize your sales funnel, improve your marketing ROI, launch new products successfully, and enter new markets profitably.

We use a hypothesis-driven, data-supported methodology to discover insights that no one else is paying attention to. Then, we help you assemble the right sales strategies, marketing plans, technologies, and resources to seize this opportunity.

About the Author

Rob Ristagno, founder and CEO of the Sterling Woods Group, previously served as a senior executive at several digital media and e-commerce businesses, including as COO of America’s Test Kitchen. Starting his career at McKinsey, his focus has always been on embracing digital technology and data science to spur strategic growth.

Rob is the author of A Member is Worth a Thousand Visitors and is a regular keynote speaker at conferences around the world. He has been featured on ABC, NBC, CBS, Fox, and Digiday.

He holds degrees from the Harvard Business School and Dartmouth College and has taught at both Harvard and Boston College.

Rob lives outside Boston, MA with his wife, Kate; daughter, Leni; and black lab, Royce.