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BUDGETING

When It's OK to Ignore Costs

I know, I know: You're worried about expenses. But sometimes you need to invest in developing new friendships for your company.
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As young business operators, we are constantly monitoring our expenses. We are consumed with keeping costs down and eliminating unnecessary ones. After all, this equation is ingrained in every businessperson's mind: P (Profit) = R (Revenue) - E (Expenses).

It's impossible to not care about business expenses—and we've all had plenty of sleepless nights worrying about a financial model that bleeds red.

But I'll tell you a little secret, although it will probably cause my business partners' hearts to skip a beat. Costs are not always relevant.

The struggle that every young entrepreneur has is: How do I want to grow my business? The right approach depends heavily on one's business strategy and long-term goals.

After business school, I had the opportunity to work at Limited Brands as a marketer and strategist. The company—which also operates the Bath & Body Works and Victoria's Secret chains—is one of the great retailers of our time. (Don't believe me? Check their stock price growth, recent earnings, and Q4 comps.) One of the many things I learned during my time there was the importance of making friends—even when it takes your focus off cost-cutting.

What does that mean? It relates both to costs and to you as an entrepreneur. Here are two key cases in which you should stop focusing on costs in order to make new friends for your company.

1. Smart Pricing

One way to make friends is through lower entry price points. Whether you are rolling out a new product or a new brand, you have one big goal: Get customers. Even as a luxury brand like FITiST, we need to get people in the door—and sometimes we do that by offering low price points.

Once customers are in the door, they can fall in love with your product and develop loyalty. That's when they can buy more and pay more.

One company that does this well is American Express. AmEx makes friends with introductory offers that generate value: 0 percent annual percentage rates, no late fees, and no annual fees in your first year. Once you are in the door and have developed loyalty to the card, normal fees and costs kick in. By then, the friendship has been built.

2. Adding Value

Want to re-engage existing customers and excite new customers? Give them a reason to buy with added value. In essence, you are making a friend by rewarding them with something special.

At FITiST, we have built loyalty by rewarding our best customers with a surprise add-on—an unexpected massage (what's better than that?) or an expert consultation with any purchase. We surprise, delight ... and, of course, build loyalty.

For a great example, look at the "gift with purchase" programs that have become prominent in the cosmetics industry—particularly with Clinique. Multiple times a year, Clinique offers a gift of full- and trial-size products—they call it Clinique Gift Time. Amazingly, "Gift Time" drives more than 25 percent of Clinique's yearly sales.

So, going back to that profit equation: Sometimes the best way to drive an increase in revenues is to strategically incur expenses. Now you have two things to keep you up at a night: expenses and how many friends you have.

IMAGE: flickr/xolar99
Last updated: Feb 13, 2012

CAROLINE LIMPERT | Columnist | Co-Founder, FITiST

Caroline Limpert is the co-founder of FITiST, the first one-stop membership and bookings platform for specialty fitness studios in NYC and LA. Before FITiST, she helped build new businesses for NY-based VC firm Tricera Partners.

The opinions expressed here by Inc.com columnists are their own, not those of Inc.com.



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