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The problem is that reducing costs doesn't typically scale. If you want to grow a businesses profit significantly, you need to increase sales. It's entirely rea
by nfm 14y ago
The problem is that reducing costs doesn't typically scale. If you want to grow a businesses profit significantly, you need to increase sales. It's entirely reasonable to double your sales. It's pretty difficult to halve your costs.
- baruch 14y agoIn order to double the profits you need to either double the sales or eliminate all costs. Or do a mix of both. Doubling sales multiple times is more likely than making profits on your infrastructure... Amazon AWS is probably the exception here.
- ksmiley 14y agoHow much you need to reduce costs, in order to double your profit, is dependent upon your current costs and revenue. So you don't necessarily need to eliminate all costs to double profit. Suppose you purchase widgets from a manufacturer for 100$ and sell them for 101$. In that case, 101$(revenue per widget) - 100$(cost per widget) = 1$(profit per widget). Suppose you then change manufacturers and reduce your cost per widget to 99$. You now make 2$ profit per widget. By reducing costs by 1%, you doubled your profits. Much easier than doubling your sales.
- nfm 14y agoIn theory, yes, but if you have a profitable business with a 1% margin by definition it already has to be absolutely giant (e.g. Amazon) to be making money. And to reduce costs at this scale is harder than increasing sales.