Frugality – not just for when things are going badly.

In Working Backwards, Bryar and Carr list Amazon’s core values and one of those is frugality “Accomplish more with less”. Amazon famously had their early staff sit at desks made of cheap doors from Best Buy and fly economy. Additionally in Vance’s autobiography of Elon Musk, he tells the story of an Engineer at SpaceX getting a quote for a component of $120,000. Instead Elon told him to build it himself with a budget of $5000.

Elon goes further with the so called “idiot index” – the gap between the cost of the raw materials/components and the actual cost to produce a product a business incurs.

Let’s start with what it means to be frugal. It can be considered as living as carefully and as minimally as possible, typically with a focus on spending very little. In business situations it is about spending money wisely for value creation and profit realisation.

If you raise millions in venture capital funding, the expectation is the money should be deployed to get a return, however sometimes it is preferable to bootstrap on less. We’ve already seen how Musk and Bezos we’re careful in the early days of their businesses and in “I’m Feeling Lucky, Confessions of Google Employee number 59” Edwards recalls how Google squeezed in computers into a tight area of a data center to save cost and engineers would cram four boards onto each tray and “Inktomi had a cage in the same data center, twenty times bigger that Google’s”.

Now you might say “Well what about Google’s perks?” In “How Google Works” by Schmidt and Rosenberg they talk about packing employee desks in tightly with breakout areas to rest. Not only are perks like free meals great PR, but they support staff to work better and for longer.

And speaking of working, Musk famously works his staff hard and Bezos said: “You can work long, hard, or smart, but at Amazon.com you can’t choose two out of three”.

So far the formula seems to be spend as little as possible and work staff as hard as possible.

So is this the end of the sermon? Run a business like a slave-driving accountant? Yes and no.

Yes: The livelihoods of all the employees and investors plus the service you give to customers relies on the financial success of a business.

No: If you pay your staff terrible wages and give no perks, aside from the ethical considerations, you’re setting yourself up for low-skilled, disillusioned, unhappy staff. Also working staff too hard could cause burnout and mistakes.

Yes: Ben Horowitz in his book “The Hard Thing About Hard Things: Building a Business when there are no easy answers” talks about how his company LoudCloud raised several rounds of funding and how it was one of the fastest growing companies of all time, but then came the dot com crash in the early 2000s that “spooked investors” and that he had to raise cash again by going public (they had 6 weeks of cash left before they went bankrupt). Then one of his largest customers went bankrupt and he sold the business to EDS.

No: If LoudCloud had no value, there wouldn’t have been anything worth selling.

Yes: Every unnecessary penny you spend reduces a business’ leeway and can cause doubt about the company’s viability and management.

No: Bezos invested heavily in Amazon Prime (the logic being that engaged users buy more)/Video (for example spending $465 million on The Rings of Power season 1) and Kindle (seeking to disrupt his own physical book selling business before a competitor could). In The Everything Store by Stone, he shares the story of when Bezos sought to neutralise rival Zappos by building a separate website to Amazon for Shoes and Handbags and his staff asked “How much money do you want to spend on this?” and Bezos replied “How much do you have?” before eventually acquiring Zappos. When a company is deploying resources well/to achieve a higher growth outcome, investment/spending supports this value creation.

Yes: You should treat company money as your own.

No: In companies where costs are very tightly controlled, businesses rather than trimming the fat, can cut into bone and deliver amateurish or sub-standard products/not convey the required level of professionalism. Staff can spend a disproportionate amount of their time trying to make economies that aren’t as valuable as the time they are spending on it. Additionally, if you ignore areas like training your staff, investing in new equipment or automation and replacing items that have amortized, eventually the value of the business could suffer.

My take on this is a business should keep frugality in mind.

For example:

Can we get the same product or service for less money with a different supplier?
Do we need a large expensive office in a prime location, especially with remote working?
Can we negotiate a discount with our suppliers?
Can we save on licenses?
Can we make the same or better product cheaper?
Can we automate some of the work?
Is there any government support available (grants, loans, local premises’ tax discounts, r&d allowances and so on)?
Do we need to make that new hire?
Can we hire direct from linkedin or from our network rather than pay a recruiter?
Can we finance the business more cheaply?
Can we take advantage of low cost marketing opportunities (customer referrals, posts on social media (facebook offers free business pages), a special offer/campaign or registering your location on Google places) or less conventional methods for drawing attention? For example Google once put a puzzle on a billboard near an office that (once solved) led to a website with a second puzzle that led to login details that led to a job offer. This was picked up in the press and got Google huge positive publicity.

However ultimately a business exists to provide value and make a profit. Yes Bezos said “Your margin is my opportunity” and used his frugality to establish a dominant price-leadership strategy, however we shouldn’t forget that Amazon relies on its website being up to take sales, marketing to drive traffic and its fulfilment network to deliver for their customer. It has built a reputation of competence and trust. Frugality is just one of it’s principles.

Instagram was sold to Facebook for one billion USD with only 13 employees, but that is rare. If you scrimp, by, for example, making a flyer in a word processor and opt for cheap options you’re unlikely to add/create as much value and develop your reputation, but if you overspend your business may waste money – and assuming it’s borrowed money – that cost will be amplified over time.

There’s also the case of spending on advertising or a sales team or a new logo that could increase sales. In such a case you may be able to optimise these activities to a sweet spot of cost vs reward through experimentation and checking the data/performance.

In my opinion the secret of Frugality if there is one is to get good/fair (efficient) value from your expenditure, not just when things are going badly but crucially also when things are going well.

In “The Personal MBA”, Kaufman talks about Value Capture (“Value capture is the process of retaining some percentage of the value provided in every transaction.”).

Thus if a business creates something worth/saves 10 million, and charges 1 million, it is still a good deal to buy it.

Frugality lets you control less of the value the customer gets by charging less that can increase your competitiveness, reputation and sales. Alternatively you could take the reduced costs to invest or improve your profitability in the near term. However frugality should be balanced with the need to increase the value you give over time as well.