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    Rework

    It’s Time to Care About Costs

    Wed Jun 07 2023
    cost managementventure capitalbusiness expensespricing modelsSaaS software

    Description

    The episode discusses the importance of cost management for businesses and the challenges they face in making more money than they spend. It explores the disconnect in venture capital and how smaller businesses are more efficient in cost-consciousness. The episode also provides strategies for cost management and highlights the need for reasonable pricing options in the SaaS software industry.

    Insights

    Cost management is crucial for business profitability

    Businesses need to constantly exercise cost management to ensure independence and avoid waste.

    Venture capital-funded companies should focus on reducing costs

    Even venture capital-funded companies can benefit from cutting expenses and extending their runway between funding rounds.

    Analyzing expenses regularly is important for financial success

    Regularly evaluating expenses and identifying unnecessary costs can help businesses make more money than they spend.

    Cleaning up expenses leads to a well-run business

    Regularly reviewing and managing expenses helps maintain an efficient and successful business.

    Reasonable pricing options are needed in the SaaS software industry

    The current pricing models can lead to excessive spending, and there is an opportunity for new pricing models that provide more value to customers.

    Chapters

    1. The Importance of Cost Management
    2. The Disconnect in Venture Capital
    3. The Challenges of Making More Than You Spend
    4. Strategies for Cost Management
    5. The Need for Reasonable Pricing Options
    Summary
    Transcript

    The Importance of Cost Management

    00:00 - 06:47

    • Businesses need to watch their spending in order to be profitable.
    • Many companies are losing money but continue to spend as if it doesn't matter.
    • Highlight companies that raise a lot of money haven't cared about costs, and people tend to follow those stories.
    • As money dries up, people start to pay attention to costs and profitability.
    • Companies aren't used to being prudent about costs and find it difficult to shift into that mentality.
    • Cutting costs often involves laying off people and reducing marketing expenses.
    • It's important for businesses to constantly exercise cost management rather than suddenly having to adapt when faced with financial challenges.
    • Making more money than you spend is a fundamental part of running a business and ensures independence.
    • Overspending on unnecessary things or disproportionately priced services leads to waste in many companies.
    • Running a highly conservative business has been out of fashion for a long time, but it doesn't have to be that way.
    • Playing with your own money gives you more incentive to be cautious with spending compared to using investor funds.

    The Disconnect in Venture Capital

    06:18 - 13:01

    • Investor money in venture capital is often several layers removed from the actual people losing money, making it difficult to care about costs.
    • Smaller and bootstrap businesses are more efficient and cost-conscious because they have a direct connection to the money being spent.
    • The speaker reviews their business expenses with a critical eye, questioning the value of each line item.
    • They calculate the cost of a software tool and determine that it is not worth the price based on the amount of effort it saves.
    • Money matters because it buys independence, options, time, and flexibility.
    • Even venture capital-funded companies would benefit from reducing costs and extending their runway between funding rounds.
    • Many technology companies have been losing large amounts of money due to bloated organizations and excessive spending driven by the need for rapid growth.
    • The current crisis in technology is an opportunity to rein in these excesses and make different choices in running businesses.
    • Entrepreneurs are optimistic about growing their top line but should also consider cutting expenses as a way to extend their runway during market changes or plateaus.
    • Small businesses can become less cautious about costs as they grow, leading to overspending in later years.
    • The financial industrial complex encourages companies to spend money rather than hoard cash.

    The Challenges of Making More Than You Spend

    12:46 - 18:48

    • The financial industrial complex encourages companies to spend money and not hoard cash.
    • VC firms take more ownership of a company as it spends more money.
    • Solo entrepreneurs and small businesses are more cautious with spending because they have to make more money than they spend.
    • When using other people's money, it doesn't feel like spending, but rather playing with it.
    • Venture capital money teaches entrepreneurs how to spend, not how to make.
    • Many companies struggle to make more money than they spend, leading to financial difficulties.
    • Analyzing expenses should be done regularly depending on the stage of the business.
    • Looking at costs monthly or quarterly can help identify unnecessary expenses.
    • Considering the value and cost proportion is important when evaluating expenses.
    • Multiplying smaller numbers over time can highlight their significance.
    • Having skin in the game motivates individuals to care about expenses and value.
    • Regularly cleaning up expenses can lead to a lower effort in managing them.

    Strategies for Cost Management

    18:20 - 24:56

    • Cleaning up expenses regularly helps maintain a well-run and efficient business.
    • Using human instincts like disgust metaphors can help motivate expense review.
    • Subscriptions are an important area to look at for cost savings.
    • Pricing software based on what feels reasonable and proportionate is key.
    • Reviewing subscriptions with the same instinctual sense of value as personal expenses can lead to cost savings.
    • Comparing the total costs of multiple software subscriptions versus an integrated solution can reveal significant savings.
    • Managing expenses in good times makes it easier to handle not-so-good times.
    • Variable costs, especially per seat costs without caps, can quickly become unmanageable with growth.
    • Uncontrolled costs are harder to manage and may go unnoticed until they become a problem.

    The Need for Reasonable Pricing Options

    24:37 - 29:35

    • Basecamp offers an unlimited plan with a fixed price of $209,000 a month for unlimited users.
    • Having a fixed price helps businesses manage costs and make them predictable.
    • Variable costs can quickly get out of control, especially in cloud services.
    • It's important to find ways to fix or cap variable costs to keep them under control.
    • There is an opportunity for new pricing models in the SaaS software industry.
    • Some companies end up spending significantly more than they initially signed up for due to usage and overages.
    • Basecamp offers its service at a fixed price of $2.99 per month, regardless of company size.
    • The current pricing models in the industry can lead to excessive spending on tools like chat software.
    • During economic downturns, people may realize the need for more reasonable pricing options.
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