5 Cost-Cutting Strategies That May Cause You to Spend More

Catherine VanVonno

Catherine VanVonno

Catherine VanVonno

7 min. read

Updated October 25, 2023

A $150 llama rental for a photoshoot, $250 for a bagpipe player at a customer picnic, $5,000 for an executive’s tires — these are just some of the most questionable things people have paid for or attempted to pay for, in the name of business. 

But not all items that land in expense reports are blatantly over-the-top. In fact, some of the biggest company expenses start off as cost-cutting measures. Unfortunately, while many expense-reduction strategies are well-intentioned, some have you paying more than you bargained for.

Cutting costs vs. cutting corners

Unnecessary business spending doesn’t only take the form of trendy marketing gimmicks, excessive travel expenses, and outrageous client-nurturing projects. It can also be a result of second-rate cost-reduction tactics.

It may sound counterintuitive, but in an attempt to save money and keep their company afloat, many entrepreneurs have actually ended up misspending their funds.

Have you been making the same mistake?

Take a closer look at how you manage your company. Are you cutting costs or merely cutting corners? There may be practices that appear to save you money but result in big losses in the end.

Check out these cost-reduction methods that may eventually have you spending more.

1. Laying people off and scrimping on wages

Payroll accounts for about 50% of a company’s monthly expenses. This can place a heavy strain on small businesses that don’t have a regular stream of customers yet. When paying employees becomes too expensive, many companies either lay people off or keep their workers but reduce salaries.

While this strategy may lower your current overhead, it can also have a negative impact on employee morale and on your company’s long-term financial health. 

First, reducing salaries or offering inadequate compensation turns away talented applicants and discourages your current staff. Remember: an organization is only as efficient and productive as the people in it. If you want to attract and keep skilled and reliable workers, you must offer competitive rates.

Second, if you’re thinking of temporarily reducing staff, consider the potentially higher cost of rehiring employees or of spending money to train new people. 

Instead of reducing salaries, think about changing your payment structure. For example, you could offer sales bonuses and incentives for high-performing workers. This will encourage everyone to do their best work. It also draws highly skilled and seasoned individuals to your team, which ultimately propels your organization forward.

2. Creating complicated cost-reduction policies

Why does my company need this policy? What goals do we hope to achieve with these rules? How much are we saving by doing this and that?

It’s important to review policies before and after implementing them. As a rule, the simpler the policy, the easier it is to put into practice.

Avoid imposing rules as a result of an isolated incident. Let’s say an employee attempted to put personal charges on a company credit card while traveling for business. Apart from disciplining that person, the company also imposes a new set of rules on business travel and spending.

When these things happen, it’s better to deal with the erring employee once and in private rather than having everyone suffer the consequences. Too many complicated rules can be burdensome. Worse, impractical company policies disengage workers, cost a substantial amount of money to execute, and weigh down your company culture.

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3. Not putting resources into staff development

When a team isn’t meeting goals, some companies hire a third-party expert to fix the problem.

At first glance, this seems like a worthwhile expense. After all, isn’t it more cost-effective to pay one specialist instead of having to hire and train more people? Plus, coming up with your own solution is risky, right? Wrong.

A study by the Harvard Business Review showed that companies take a bigger risk by chasing third-party experts instead of developing the team they already have. The study found that an expert’s performance dips when switching companies and that “stars” who were successful at one company tend to fade out when they move to another organization. In addition, hiring an outsider to fix internal issues can decrease the morale of existing employees, resulting in a decline in group performance.

Think about it. When you hire outsiders instead of putting resources into developing your existing team, your staff could feel that they were overlooked and become demotivated. Instead of being inspired and rising to the challenge, they may start looking for better opportunities outside of your company.

4. Dismissing technology as expensive and unnecessary

There’s a sense of comfort and security in sticking to tradition. Perhaps this is one of the reasons some entrepreneurs dismiss newer forms of technology so easily.

Switching to apps and high-tech tools can seem complicated and costly. Can your small business really afford it?

If studies are any indication, not utilizing technology is even more costly for businesses. For instance, automating tasks allows companies to do more with less. That is, you don’t need to hire more people or pay for extra hours if you automate certain processes such as customer and internal communications and bookkeeping. 

Let’s take switching from landline to VoIP (Voice over Internet Protocol) as an example. This is one way to utilize technology to make your business processes more efficient. A landline is more familiar and less expensive at the onset, but a VoIP service allows a business to do more. For instance, VoIP has plenty of advanced features like instant messaging and app integrations.

In addition, because using VoIP doesn’t require physical phone units, you won’t need to pay for additional installations if your company expands. That’s one of the reasons it helps you save money in the long run. And switching to VoIP doesn’t have to be daunting, as many VoIP providers offer deals specifically for small-medium businesses.

But before you invest in new tech, make sure that:

  • It supports your company’s core function/s
  • It can be easily integrated into your workflow
  • It adds value to the customer experience
  • Your team has studied the new tool and knows how to fully utilize it

If driving new business development is your goal, you must learn to leave outdated practices behind and embrace technology as the resource-saving help that it is. Here are other ways to use technology to reduce operational costs.

5. Skipping brand or product promotions

Catchy online and TV ads can be too expensive for a startup’s budget. These promotional strategies usually require pricey ad agencies and huge airtime fees. Wouldn’t it be wiser to channel your funds to product development and let your products speak for themselves?

The short answer — not always.

Many entrepreneurs shy away from promotional efforts that require significant spending. But while product quality should be the top priority, there are other factors that determine whether or not your company attracts and keeps customers.

The good news is that businesses today have more affordable ways to promote their products. From attracting buyers through free social media apps to nurturing client relationships on LinkedIn, you can acquire and retain customers without shelling out the big bucks.

If you own a small business and don’t have a sizeable budget for marketing, you don’t have to hire third-party agencies to promote your brand. While this was the go-to solution in the old days, it does quickly take a toll on your funds. 

Many business owners have found that hiring a virtual marketing assistant is the solution. Marketing VAs can handle SEO and content marketing to increase your ranking on search engines. These creative professionals can also design and monitor social media ads to improve your chances of reaching your target market. They can even set up and maintain your website to ensure that you have a strong online presence. Eventually, when it makes financial sense for your business, you could also add an in-house paid ad specialist to your team.

Final thoughts

Try not to fall for the allure of the cost-cutting measures mentioned above. When done the right way, a cost-reduction action plan can help keep your company in the black. But no cost-cutting strategy should impact employee and customer satisfaction or compromise your brand’s integrity, either in the present or in the long run.

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Content Author: Catherine VanVonno

Catherine vanVonno is the President and CEO of 20four7VA, one of the fastest-growing virtual staffing companies in the eCommerce industry. She is passionate about helping small business owners scale by giving them access to reliable and highly trained virtual talent. She is also deeply invested in providing employment opportunities for skilled individuals from around the world, especially those in disadvantaged areas.