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Choose Cost-Reduction Tests That Fit Your Business Model Opportunities

Aug 3, 2008
You need lots of cost reduction ideas to test. But it's more important that the ideas be helpful ones. Let's see where you stand by considering the proposals you might have in front of you now.

By now, all of your test proposals have been checked out to see if they can be improved. Most or all tests proposals were improved by that process and some may have remained unchanged.

Some companies are lucky and it is fast, cheap, and easy to conduct tests of new business models that reduce costs. If you are in that happy circumstance, you can simply encourage people to run tests without doing any further screening.

If you are a small or resource-constrained organization or tests are expensive, you probably still have more potential tests than you can possibly do. As a result, most companies will have testing choices to make. If that is your circumstance, the rest of this section will tell you what to do.

How do you select the right one or ones to pursue?

Those who study the evolution of plants and animals usually employ a concept involving how well a genetic make-up matches its environment. Those animals and plants whose strengths and weaknesses are superior to the alternatives living in that environment will flourish. You can evaluate your potential tests in a similar way, in advance of actually testing them.

Use a series of ranking screens to determine which tests to do first. This ranking process is very important because you will probably not be able to do more than a few tests due to the costs and potential complications involved. As a result, you run a risk none of the initial tests will yield the sort of cost-based business model improvements that you need. These screens will reduce the likelihood of that delay occurring.

First, rank your cost-reduction test proposals by their potential to improve sales, before considering any changes in price. That may seem like an unusual place to start for cost-reduction ideas, but it is a very powerful point of view. The most effective cost reductions are usually those that create advantages for customers and help your organization fit in better with those customers.

As those who have employed the six sigma objective for quality improvement have found out, in many cases lowering your costs by reducing errors, for example, also means providing better business results for customers. Those cost reductions are the ones that should draw your attention first.

Second, reverse rank your test proposals by their potential to harm sales if you poorly execute the new business model. For example, if a new business model test could not possibly cost you any customers, that test would rank higher than any other tests that could cost you customers. How could a test avoid having any potential to lose customers? Most tests would have this character where you could promise in advance to immediately switch the customer back to the old business model if your performance was not satisfactory with the new business model.

Third, create an average ranking for the first two areas of effects on sales. Eliminate all of the tests that are in the bottom half of this average ranking. If you started with 100 test proposals, this drops you down to 50.

Fourth, rank the surviving test proposals by the absolute size of the total potential cost savings.

Fifth, take those same test proposals that survived step three and rank them from the smallness of the risk that you will not succeed with the test. In doing this ranking, take those with the lowest risk and put them at the top of the list. The highest risk test belongs at the bottom.

Sixth, create another average ranking using the fourth and fifth rankings. Eliminate all those proposals that fall in the bottom third of this average ranking list. If you ranked 50 proposals, you would eliminate 17.

Seventh, take the test proposals that survive the sixth ranking and rank them now by the enthusiasm felt that those who will be affected by the implementation of the change in your organization. Eliminate all the test proposals in the bottom two-thirds of this list. If 33 proposals remained, this would drop you to 11 proposals.

Eighth, take the remaining test proposals and rank them by the fit they have with the tests you have run or are running to improve value or pricing structure. Eliminate any tests that would harm your ability to implement such value or pricing structure improvements. If 11 proposals remain, this might mean dropping another four.

By now, you should have a manageable list of testing projects to pursue. If you still have more than you can afford, you can simply do them in priority order. That approach will work well unless you find that one or two tests cost more than several of the others. In this case, consider if you could learn a lot more or gain more potential benefit by doing all of the inexpensive tests first.

If the screening has dropped you down to no tests, go back to the last screen that left you at least six tests and apply the seventh and eighth rankings.

If fewer than three tests survive at this point, your thinking about potentially better business models for reducing costs was too limited. You should restart that thinking while you take on whatever tests have survived this screening.
About the Author
Donald Mitchell is an author of seven books including Adventures of an Optimist, The 2,000 Percent Squared Solution, The 2,000 Percent Solution, The 2,000 Percent Solution Workbook, The Irresistible Growth Enterprise, and The Ultimate Competitive Advantage. Read about creating breakthroughs through and receive tips by e-mail through registering for free at

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