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Small Business Cost
Reduction Gone Wrong
My wife and I knew
something was off kilter when our son called at 5:30 Thursday
evening this Labor Day weekend. The day care (called Apex Day
Care for the sake of this article) that had been watching over
our granddaughter, Claudia, for over a year while her Mommy and
Daddy worked, had just dropped a bomb on Jay. They had decided to
close the business the next day since most of the children were on
holiday and the owner knew they could save salaries and extend their
long holiday weekend to four days. Jay would understand, they said,
that this was a good business decision. Certainly either he or his
wife could take the day off or didn’t they have other arrangements
they could make? My son and daughter-in-law work for good companies
who are understanding and flexible in their policies but also have
the policy that the failure to work the last scheduled day before a
paid holiday results in the loss of holiday pay. That’s fair.
Obviously the Apex Day Care owner doesn’t have a clue about such
policies and business professionalism.
Jay tried to negotiate with the day care but
they were adamant that the decision was a good one and they were
closing the next day no matter what. It didn’t matter to them that
it was a last minute notice at the very end of the day.
Interestingly, the owner’s mother called Jay
later that evening to say that she was upset that he had accused her
daughter of making a bad business decision. It became crystal clear
at that instant that the business was far more concerned about
profits than the children. Jay told the woman that Claudia would
never be taken to Apex again.
So why am I writing this article? Sure I’m a
little upset personally that someone would treat my family this way
but there are at least two good business lessons to be taken from
this little case study:
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Cost reduction may not always be the best
business decision: The Apex Day Care business owner in this
case may have saved a couple of hundred dollars in salaries and
expenses by closing this extra day. That will quickly be offset
by the loss in revenue. By my estimate they will be in the hole
within five to ten days. Their lost revenue stream is over
$6,000 per year. Quick calls to three of the nearby
competitors revealed
that all had openings and would be happy to see the parents for
interviews and tours. This indication of plentiful supply might
indicate that Apex will have at least one more opening for some
time to come. A failure to examine cost (expense) in the
context of revenue is a common shortfall of shortsighted cost
reduction focused management and can often lead to poor outcomes.
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It’s critical to know what business you
are in and to unfailingly serve the customer with that product.
The Apex owners obviously don’t know what they’re selling. When
parents drop their precious little children off at a day care they
are putting their faith and trust in the staff and
management to care for and nurture them. They are selling trust.
When Apex demonstrated that they could not be trusted to even
maintain a schedule reliably, they opened the door to a lack of
trust in all areas of child care. Losing sight of the customer
is harmful to big business but it can be fatal to small business
profitability and/or viability.
Obviously the Apex Day Care owners lost at
least one good customer with this one bad decision. What they don’t
realize is that they are going to lose more every time they do the
same thing. The real concern is that this lack of reliability may
unfortunately reflect elsewhere in the care of the children. I’m
just happy that our little Claudia will no longer be there.
The good news was that we were in town and
available to take good care of Claudia the next day…which we did.
We are happy to be close enough and available enough to be a safety
net most of the time.
The interview for a replacement day care is in
just three days. The initial view is that it will be a far more
educational and positive experience. At least one good thing will
come from this bad business decision. Apex has been exposed for
what they are and Claudia will be in a better place.
Steven Martin
September 6, 2004
Labor Day
Williamsville, NY
Post Script, Thursday September 9, 2004: The
interviews went exceedingly well. Claudia will now be attending a
new day school that she has already shown an affinity for. The
owner an ex-lawyer with a Ph.D. in child development has an
enlightened view toward child care and a keen eye on the needs of
both children and parents (Montessori Method). We are all thrilled.
Another Post Script, Friday December 10, 2004:
Claudia is thriving at her new day school and everyone is delighted.
We learned yesterday that Apex Day Care has given a 2-week notice to
its remaining clients that they are shutting down for good. It
seems that their questionable business decisions have finally
brought them to failure. I hate to see that happen as it is
hard on all involved but business is truly a matter of survival of
the fittest.
I think this case also illustrates the
principles of "critical mass" and "break even." Apex was small
to begin with (a selling point) but, in hind sight, teetering on the
brink of not having enough mass (facilities, staff, services, etc.) to sustain
a competitive level of product delivery and
thus attract new clientele. Recent marketing attempts had been
unsuccessful and the school had reduced its floor space in an
economic move reducing mass even more. By that time however
the economics were so tight that losing one client dropped them
below break even into an unprofitable state from which they could
not recover.
A final Post Script, Thursday June 15, 2006:
Claudia graduated today from her Montessori school with a tremendous set of social skills and
pre-K learning that sets the stage for a lifetime of success.
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