If you have cost drivers, you’re doing it wrong.
When considering whether to accept a marginal cost, it’s only a sustainable business choice if it creates a larger marginal profit. The marginal profit might be paid off instantly, or in several years, but for it to be a sustainable business choice, it definitely has to pay off.
This isn’t just sometimes-true. It’s always true. The ONLY time it’s a good idea for a business to take on a marginal cost, is in expectation of a larger marginal profit as a result.
This is not selfish. It’s not greedy. It’s a recognition of customers voting with their money for which extra value they want – and knowing that the customer’s money-vote is what creates the platform for the business to keep existing.
Getting this right is the foundation for creating sustainable change.
There are 2 categories of mis-labeled cost drivers worth paying extra attention to.
Activities that are vaguely imagined to be profit drivers, but are treated as cost drivers.
This is how most people treat the all activities vaguely labeled “branding”. A budget is set aside and burned with the expectation that somewhere, down the line, it’s going to pay off. Maybe brand lift studies are conducted, to prove some sort of spend efficiency.
In theory, a profit driver. In practice, because of poor measurement, and the very risky way branding budgets are spent – a cost driver in the way it’s treated.
If branding was truly seen as a profit driver, the spend would be scaleable, uncapped by anything but limitations in the production and delivery capabilities of a business.
Solution idea (to avoid arbitrary budget caps on a profit driving activity): Apply proper measurement to branding activity (allow for 90+ day attribution windows) and/or embed branding spend in performance marketing spend, working with a blended ROAS with a low fractional spend being allowed to run at just above breakeven for expected long-term utility.
Activities that are imagined to be cost drivers.
Customer service is the classic example, but this applies to most operational costs.
As stated above, wherever an incremental cost is taken on, it’s to gain a larger incremental profit. An extension of this logic allows that there is a continuum to operate within, where an optimal balance of incremental cost and incremental profit might exist.
An example:
A company might take on a low cost for delivering a barebones CS experience. This creates some marginal profit by avoiding the very worst pains of poor (or no) service. The net gain might be 1%.
Another company might choose to take on an insane level of cost to deliver a truly epic CS experience. This creates a massive chunk of marginal profit. Because of the cost exploding, the net gain stays fairly low at 3%.
Somewhere in between these boundaries lies a series of potential local maxima where net profit as a function of CS activity is highest. The task in optimising the profit driver is to find first the local maximum, and then explore outside of the local area to find the global maximum.
If the CS function is treated like a cost driver, the untapped potential for finding the global profit driving maximum is ridiculous. It’s similar to treating marketing and advertising as a cost driver. It makes no sense.
The same math applies to delivery options, shipping speed, packaging, development, pick and pack operations, and literally any other aspect of a business you might think of.
Bottom line:
Cost drivers are profit drivers that haven’t been optimised.