Master the Art of Business
A world-class business education in a single volume. Learn the universal principles behind every successful business, then use these ideas to make more money, get more done, and have more fun in your life and work.
Incremental Degradation is the process of making a business offer worse and worse by trying to cut costs. Saving money doesn't help it you need to lower the quality of your offering to do it.
Cost saving measures Accumulate over time, and end up having an impact on quality. Cutting costs can help to increase the Profit Margin, but it usually comes at a steep price.
Cutting costs can only take you so far. Creating value will always cost some amount of money, so there's a limit to this strategy.
Creating and delivering value is a much better way to improve your business. There's no limit to how much value you can provide.
Control your costs, but remember why your customers are buying from you.
Believe it or not, many of the chocolate products found in the candy isle of grocery stores are no longer "milk chocolate"-they're "chocolate-flavored candies." What gives? To make high-quality chocolate, you have to buy high-quality cocoa beans, which are ground up to make cocoa butter.
Cocoa butter is then combined with sugar, water, and emulsifiers, which help the oils in the cocoa butter "stick" to the water-saturated sugar.
The liquid chocolate is then heated, poured into molds, and cooled to produce solid chocolate.
Over the years, major mass-market chocolate manufacturers decided to use cheaper ingredients to keep costs down and increase profitability.
Instead of buying high-quality cocoa beans, they bought less expensive beans from mediocre sources-who would notice? Then they replaced cocoa butter with vegetable oils-so much that food regulatory bodies wouldn't allow them to call it "milk chocolate" anymore.
They added more emulsifiers, preservatives, and other chemical additives to keep the zombified chocolate together and to make it last forever on the shelf.
Sounds appetizing, right? Saving money doesn't help you if you degrade the quality of your offer.
At the time, these "cost saving" measures didn't appear to have a huge impact on the chocolate's quality-they seemed to be a Tradeoff worth making. Over time, however, the Accumulated effects undermined the taste and quality of the product.
People noticed, and so did the manufacturers: you can now buy "premium" versions that contain the original high-quality ingredients.
Finance and accounting execs get their "bean counting" reputations from focusing primarily on cutting costs-reducing expenses in an effort to make an offer or business more profitable.
Cutting costs can help you increase your Profit Margins, but it often comes at a steep price. If your goal is to increase your profitability, cutting costs can only take you so far.
Creating and delivering value will always cost at least some amount of money, so there is a lower bound on how much you can cut costs before the cuts begin to diminish the value you provide.
Cutting costs that are wasteful or unnecessary is certainly a good idea, but Diminishing Returns always kick in-be careful not to throw the baby out with the bath water.
Creating and delivering more value is a much better way to enhance your bottom line. You can never spend less than nothing, but there's no upper bound on the amount of value you can provide or revenue you can collect.
Control your costs, but don't undermine the reason customers buy from you in the first place.
"Quality, quality, quality: never waver from it, even when you don't see how you can afford to keep it up. When you compromise, you become a commodity and then you die."Gary Hirshberg, founder of Stonyfield Farm
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Master the Art of Business