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A piece of advice I once got from an old boss and very successful entrepreneur was to focus on increasing revenue, not on decreasing costs. I said don’t both wa

A piece of advice I once got from an old boss and very successful entrepreneur was to focus on increasing revenue, not on decreasing costs. I said don’t both ways increase profits? He responded that your costs could only go down 1x but your revenue can go up almost infinitely. Not to say that frivolity is good and frugality is always bad. But it shouldn’t be an obsession. As an employee I would much rather work for a company with soaring revenues than one with quickly decreasing costs :)

malavwarke 6y ago
got it, thanks for sharing, optimize to increase revenue instead of just focusing on cutting cost.
maccard 6y ago
It really depends on the costs. If your cost scales with your users/usage, then reducing those costs is even more worthwhile. A 20% decrease in cost is 20% more revenue now and forever. And many of those reductions are easier to make now than when you're fully scaled up.
- incrudible 6y ago
  > A 20% decrease in cost is 20% more revenue now and forever. Cost and revenue are not related like that. You're thinking of profit margin, but even then it's not that simple. Most expenses can be written off, but profits are taxed. Revenue can be increased by spending, by adding features that increase demand, or just by plain advertising. You can have high profit margins but low profits due to low revenue, all because you cut spending. Moreover, for a new company, being profitable is far less important than (an expectation of) growth. A mostly unprofitable company like Tesla has incredibly high expectations of the future already priced in.
- spenczar5 6y ago
  That's a good point, but generally "frugality" doesn't refer to unit costs, which are the thing you're describing. It usually points to things like "buy laptops on craigslist instead of new."
  - maccard 6y ago
    I don't think that's necessarily true. There are plenty of cases where frugality would be reasonable with unit costs. A team running a k8s cluster on eks with redundancy while they're working on an MVP is likely spending 5x what they need compared to running a single fargate container/DO droplet. I would definitely consider the reverse of that being "frugal". There was a post on HN recently about a SAAS that listed out all of the SAAS products they were using, and for a team of 5 they were purchasing g suite, an email productivity "enhancer" to avoid conversations moving to slack, and a meeting scheduling tool, for 10% of their revenue (something like $150/month). Being frugal would likely have cost them less than percentage points of productivity, and increased their runway.
    - spenczar5 6y ago
      Sure, there are definitely cases where you can be frugal on unit costs. I think your examples are not very good ones, though. The cost of a kubernetes cluster while working on an MVP is not a unit cost. It's a development cost. If they don't even have the MVP yet, then I don't think it's fair to say they're going to pay a multiple of that kubernetes cost for every sale - I could be wrong of course, the details matter. Your second example to me seems more clearly totally fine. Those costs scale with the number of employees, not with the number of sales. If their sales scale linearly with their number of employees, they are totally screwed under the VC funding model. As somebody upthread said, frugality is important for traditional businesses, but not so much for software-y startups. $150/month is peanuts for their runway almost certainly, too. Think about it this way: even at a meager $50k/employee/year, their costs are 99.3% in the employees, and 0.7% in those software products. Or think of it this way - $10k will cover the $150/month for over 5 years, which is a really long time.
- chadash 6y ago
  For unit costs, sure. Some HFT funds are relentless in shaving fractions of cents off of their costs. I’m not sure I would call them frugal though. When I hear frugality I think more in terms of buying used furniture or decreasing travel budgets. Might be wise, but probably shouldn’t be the focus over increasing revenue for most companies.
breck 6y ago
> costs could only go down 1x but your revenue can go up almost infinitely. Love this. The one caveat though, and why it's important to keep costs low (maybe wait until after you sell the startup), is because when you are profitable, then you are in control of your time and get to set your own schedule. Or, in the form of the above quote: your revenue can go up to infinity but your time left is capped at 100.
- yowlingcat 6y ago
  > and why it's important to keep costs low (maybe wait until after you sell the startup), is because when you are profitable, then you are in control of your time and get to set your own schedule This presupposes that you can get to high marketshare profitability while keeping costs low. That's not always realistic. A more growth-minded competitor can push you out of the market entirely by willing to execute where you won't.
  - breck 6y ago
    Yes, you are right. It hadn't yet crystalized in my mind but to clarify my advice is keep your personal cost of living low as a rule of thumb. Optimize for free time over more money. For business, spending money is essential. Ideally try to spend other people's money.
troupe 6y ago
On the other hand, spending money on things that have no link to profitability may shorten your runway and running out of money can put a crimp in your ability to generate profit. Amazon's homemade desks are an example of this. Amazon is very willing to spend huge amounts of money on thing that have a chance of increasing profit, but frugal in areas that can't be tied to long term profit.

malavwarke 6y ago

got it, thanks for sharing, optimize to increase revenue instead of just focusing on cutting cost.

maccard 6y ago

It really depends on the costs. If your cost scales with your users/usage, then reducing those costs is even more worthwhile. A 20% decrease in cost is 20% more revenue now and forever. And many of those reductions are easier to make now than when you're fully scaled up.

incrudible 6y ago
> A 20% decrease in cost is 20% more revenue now and forever. Cost and revenue are not related like that. You're thinking of profit margin, but even then it's not that simple. Most expenses can be written off, but profits are taxed. Revenue can be increased by spending, by adding features that increase demand, or just by plain advertising. You can have high profit margins but low profits due to low revenue, all because you cut spending. Moreover, for a new company, being profitable is far less important than (an expectation of) growth. A mostly unprofitable company like Tesla has incredibly high expectations of the future already priced in.
spenczar5 6y ago
That's a good point, but generally "frugality" doesn't refer to unit costs, which are the thing you're describing. It usually points to things like "buy laptops on craigslist instead of new."
- maccard 6y ago
  I don't think that's necessarily true. There are plenty of cases where frugality would be reasonable with unit costs. A team running a k8s cluster on eks with redundancy while they're working on an MVP is likely spending 5x what they need compared to running a single fargate container/DO droplet. I would definitely consider the reverse of that being "frugal". There was a post on HN recently about a SAAS that listed out all of the SAAS products they were using, and for a team of 5 they were purchasing g suite, an email productivity "enhancer" to avoid conversations moving to slack, and a meeting scheduling tool, for 10% of their revenue (something like $150/month). Being frugal would likely have cost them less than percentage points of productivity, and increased their runway.
  - spenczar5 6y ago
    Sure, there are definitely cases where you can be frugal on unit costs. I think your examples are not very good ones, though. The cost of a kubernetes cluster while working on an MVP is not a unit cost. It's a development cost. If they don't even have the MVP yet, then I don't think it's fair to say they're going to pay a multiple of that kubernetes cost for every sale - I could be wrong of course, the details matter. Your second example to me seems more clearly totally fine. Those costs scale with the number of employees, not with the number of sales. If their sales scale linearly with their number of employees, they are totally screwed under the VC funding model. As somebody upthread said, frugality is important for traditional businesses, but not so much for software-y startups. $150/month is peanuts for their runway almost certainly, too. Think about it this way: even at a meager $50k/employee/year, their costs are 99.3% in the employees, and 0.7% in those software products. Or think of it this way - $10k will cover the $150/month for over 5 years, which is a really long time.
chadash 6y ago
For unit costs, sure. Some HFT funds are relentless in shaving fractions of cents off of their costs. I’m not sure I would call them frugal though. When I hear frugality I think more in terms of buying used furniture or decreasing travel budgets. Might be wise, but probably shouldn’t be the focus over increasing revenue for most companies.

breck 6y ago

> costs could only go down 1x but your revenue can go up almost infinitely. Love this. The one caveat though, and why it's important to keep costs low (maybe wait until after you sell the startup), is because when you are profitable, then you are in control of your time and get to set your own schedule. Or, in the form of the above quote: your revenue can go up to infinity but your time left is capped at 100.

yowlingcat 6y ago
> and why it's important to keep costs low (maybe wait until after you sell the startup), is because when you are profitable, then you are in control of your time and get to set your own schedule This presupposes that you can get to high marketshare profitability while keeping costs low. That's not always realistic. A more growth-minded competitor can push you out of the market entirely by willing to execute where you won't.
- breck 6y ago
  Yes, you are right. It hadn't yet crystalized in my mind but to clarify my advice is keep your personal cost of living low as a rule of thumb. Optimize for free time over more money. For business, spending money is essential. Ideally try to spend other people's money.

troupe 6y ago

On the other hand, spending money on things that have no link to profitability may shorten your runway and running out of money can put a crimp in your ability to generate profit. Amazon's homemade desks are an example of this. Amazon is very willing to spend huge amounts of money on thing that have a chance of increasing profit, but frugal in areas that can't be tied to long term profit.