Cost Reduction Methods for Merchants: 8 Ideas to Reduce Expenses in Your Business

It’s a question that has plagued business owners since the beginning of time: How can you reduce your expenses and cut costs without sacrificing quality? With small businesses being constantly squeezed by increases in expenses, controlling costs is always an important issue.

For many businesses, one thing that’s non-negotiable is product and service quality, even when trying to cut costs. That’s a smart decision considering customer satisfaction and loyalty are highly dependent upon quality. But higher costs are often associated with higher quality, so it’s up to small business owners to find other facets of the business to reduce expenses that don’t affect their product.

Fortunately, there are cost-cutting methods small business owners can implement that don’t require a sacrifice in product quality or customer service.

1. Audit operational expenses

There are many operational expenses that small businesses can incur — some that are essential, and some that are just nice to have. Dig in and compare the cost of these expenses to the value they provide to your business, and make adjustments accordingly.

Credit Card Processing — Profits can take a big hit thanks to fees associated with accepting credit card payments from customers. Take a look at the number of cashless purchases being conducted in your business and what you’re paying to process those payments, then explore whether or not there’s a more cost-efficient alternative.

One example of a merchant that took this step is Brett Woods of JeepSwag.com, who saved $1,200 when he switched to a better payment processor.

“I always suspected that I was overpaying a bit on credit card processing,” said. So, he connected with Payment Depot, a membership-based payments processor to see if he could lower his costs.

“It was really neat to see that they [Payment Depot] could compare my old statements, and really show me upfront how much money I was going to save by switching,” Brett added.

Being a small business, I try to make every dollar count. And The $1,200 I save with Payment Depot, I can put into marketing and help grow the business and turn that into more profit.

Electricity and Utilities —  If you have a brick-and-mortar location, you need lights, heat, and air-conditioning, but small steps can lead to big savings over time. For example, lower the air conditioning during the summer, keep the heat comfortably low in the winter, and switch to energy-efficient light bulbs.

Internet, Phone, and Cable — While everyone likes to be able to hop online or watch cable TV during the day, are they really necessary to your business? If so, shop around for cheaper packages, look for promotions or special rates offered to small businesses, and consider switching to a more affordable service with a different provider.

2. Rent out your space

Every business needs somewhere to operate, and unless you’ve struck gold, there’s almost always a cost for the location. Whether it’s a mortgage on a building or rent on retail space, it’s a predictable expense every month — and it can get rather pricey.

To contribute to the cost of operating your location, consider renting out your space for to other merchants.

Consider the case of Metropolis, a gift and card shop in Seattle. When the business got hit with the recession in 2008, owner Terry Heiman asked his landlord for permission to sublet his space in order to lower his expenses.

The arrangement worked out well. According to Entrepreneur:

Heiman spent $1,000 to install a loft-style wall between the spaces, and each store has its own entrance, address and separate utility metering, making for easy division of expenses. He collects the rent and writes one check to the landlord each month.

Another option is to open up shelf space. If there’s an easy way to make room for more displays from another company, it’s a great way to bring in additional foot traffic. You might even be able to work with them and get in on a portion of the sales.

3. Focus on customer retention instead of acquisition

The saying goes that the cost of acquiring a new customer is anywhere from five to 25 times more expensive than retaining an existing one. Customer retention doesn’t only bring in financial rewards; more importantly, it can be a cost-efficient means of boosting sales. According to Bain & Company, repeat customers are also likely to spend more, with that amount increasing over time.

So how do you retain customers?

That can be done through improved customer service that goes above and beyond, rewarding your most profitable and loyal customers, personalizing any correspondence, and making it convenient for customers to find — and buy — everything they need.

4. Reduce staffing costs

Every business needs staff, but not every business has to be fully staffed 365 days out of the year. If there are slower times, reduce staffing to reflect the actual need. Many times employees will be happy to take the time off, especially those of the older generation.

One thing you could do is analyze the sales and traffic trends in your store and identify peak hours. If you’re using a modern POS system, see if it can generate a report on “sales per hour” or something similar so you can figure out when people are coming in.

Having that insight will allow you to schedule shifts accordingly, so you don’t end up overstaffing your store when there aren’t many customers.

Another option is to use family members in your business whenever possible, as it keeps money in the family — and just as with normal employees, family members working for you are fully deductible as a business expense.

5. Cut insurance costs

For most small business owners, the bane of your existence is the annual insurance bill, as premiums have skyrocketed in the past decade. However, lack of sufficient insurance coverage could bring down your business, so you still have to purchase as much as you can reasonably afford.

Sit down with your insurance broker and perform an annual review of your business insurance requirements, discussing all aspects of your coverage, and have them shop around to get the best deal. Oddly enough, the same coverage by different insurance providers can have completely different rates.

Another way to reduce your premiums is to increase your deductible. Just make sure that your deductible isn’t so high that your business wouldn’t be able to afford it if you had to make a claim.

6. Examine how time is spent

As a busy small business person, you know that time is your most valuable asset. You should always be prioritizing the most important activities and not wasting time, but small things you’re doing might not be making the best use of your time. In other words, time management is one of the most important tools to success.

Do you drive across town to buy supplies when you could get free shipping from the store down the street? Do you spend hours inputting receipts, uploading tracking numbers, and many other types of traditional manual entry when those tasks could be automated?

Start tracking how your time is spent and evaluate whether or not there are areas and tasks that could be streamlined, leaving you more time to focus on the continued success of the business.

7. Minimize your tax bill

One of the best ways to improve your bottom is to improve your tax situation. It’s helpful to have a skilled tax professional on hand to make sure you’re maximizing of all your available deductions, and that all the business expenses are properly entered on your tax return.

Make sure to keep track of all those business expenses by saving receipts, filing them as you collect them, deducting travelling expenses, and stay up to date with tax changes.

And as Rob Webber, CEO, MoneySavingPro, advises, “If you have unsold or unused inventory, donate it and get the tax deductions instead of spending cash to store it. Company donations of money, supplies, and property are all considered deductible expenses.”

8. Analyze supply costs

Wholesale supply costs vary greatly across industries, but what they all have in common is that getting the best deal on supplies has a huge impact on your business’s bottom line. The easiest way to make sure you’re getting the best deal is to constantly monitor supply costs, checking for discounts and looking into alternate sources.

If you find a better price than what you’re currently paying, don’t be scared to ask your wholesaler to make that price or switch suppliers. Make yourself popular with your suppliers by always paying your bill, and paying your bill on time — or even early. Some offer discounts if the total is paid in full and paid early.

Another option is to find other businesses that are open to pooling their resources with you, which results in both parties saving money on supplies and goods. Walmart did just that a number of years ago. The retail giant teamed up with businesses when purchasing supplies and raw materials to get more buying clout and lower their costs.

The final word

Of course, there’s no one simple solution for cutting costs while maintaining product quality. But by following the tips above, it can help you figure out the areas where your costs are generating the least value. This will leave you more time, resources, and capital to focus on growing your small business.