4 Ways to Cut Production Costs Instead of Your Team When money gets tight, find solutions that don't cost jobs.
By Per Bylund Edited by Jessica Thomas
Opinions expressed by Entrepreneur contributors are their own.
For the first time in its brief-but-bountiful history, Silicon Valley is pumping the brakes. In response to an increasingly conservative investment climate, major startups such as Evernote, Jawbone, Hootsuite and Snapchat are cutting staff.
That may work for powerhouse tech startups, but what about entrepreneurs? When funds run thin, can you afford to chop the one and only staff developer or the account managers? With a limited budget and a small team, the best solution may be to limit production costs. But how?
Entrepreneurs can't be like Apple, which leverages volume discounts to offer pixel-perfect screens and stainless steel hardware at low costs. And they don't want to be like streaming service Grooveshark, which launched in 2006, the same year Spotify was developed. It didn't pay for licenses from rights holders and was forced to reactively juggle legal battles while Spotify soared.
Related: Never Let a Downturn Crush You
The key is to be proactive. Find ways to lower production costs before your budget feels the pinch. This not only keeps more cash in the bank, but it also makes you a threat to more established companies. Electronics company Xiaomi usurped Samsung as China's best-selling smartphone company by proactively negotiating with its suppliers.
Produce like a pro.
Done right, a watchful eye on production leads to a better product at lower prices, improved financial security and the ultimate competitive edge. Four steps are key to proactively managing production:
1. Let price point dictate production.
While it seems logical to choose a product first, the production method second and the price point third, that's not actually the best course of action. Instead, estimate the product's market price -- what you can realistically sell it for -- and work backwards.
Let's say you're a smartwatch manufacturer. You've done your homework and seen similar products selling for $250 each. You'll need to tailor production to keep costs lower than estimated revenues. So, while you might really dig that leather armband for your smartwatch, the budget might dictate that you choose plastic instead. Just be sure to consider all types of costs, including development, prototypes, certifications and manufacturing.
2. Default to outsourcing.
In-house production, while the obvious route, isn't always the most cost-effective one. It's important for entrepreneurs think about outsourcing instead of focusing too much on what they want to produce internally. Many people attribute this very strategy to Skype's success.
When the video communication startup launched, it outsourced development to an Estonian team that did such a great job that 44 percent of the Luxembourgian company's staff is now based in Estonia. Microsoft must have approved, considering it bought the company for $8.5 billion. No matter your business, there's no reason to consider it a one-stop shop.
Related: 5 Tips for Outsourcing Product Development
3. Experiment with the unexpected.
People have come to expect gadgets to look and feel a certain way, which tends to stunt imagination. But the most successful products break the mold.
When Swiss-based energy company Alevo received $1 billion to develop its innovative energy storage system, it certainly didn't look to store-bought AAs. Instead, it turned shipping containers into large batteries, enabling energy producers to store grid energy that was previously wasted.
It's easier said than done, of course, but look past conventional materials and production methods. The most innovative paths are those that haven't been trod before.
4. Befriend local suppliers.
Establish close relationships with regional manufacturers understanding of your goals and willing to innovate with you. It may cost more than working with a run-of-the-mill plant in China, but -- as thousands of entrepreneurs can attest -- it beats supply chain disruption.
Local manufacturer relationships enable co-creation efforts, and they save money and headaches when problems arise. Dotcom Distribution saw the perks of staying local after it began doing business with a local shoe company. A hiccup due to poor planning could have corrupted the partnership, but the two were able to stand under the same roof and work through it.
Related: The Pros and Cons of Manufacturing in China
It pays to outsource. Just don't chase low costs at the detriment of a close-to-home supply chain and crazy-enough-to-succeed production experiments. The next time investor funding slows, your product won't suffer. And your staff won't have to either.
