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Spare No Expense

Even the staunchest budget “hawk” understands that you can’t cost-cut your way to growth.

One wouldn’t think that cost control was ever an issue for the Beatles, especially when they were recording the Sgt. Pepper album at the height of their fame. But, in fact, the subject of costs and budgets apparently arose frequently, whenever John or Paul wanted to do something a little bit crazy.

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As Geoff Emerick, the group’s recording engineer, recounts in his recent memoir, Here, There and Everywhere, the matter of expense nearly squashed John Lennon’s request to hire a 90-piece orchestra to fill a 24-bar gap in one of his songs, “A Day in the Life.” John thought it would be really cool to have London’s finest classical musicians show up and simply play every note on their instruments, from the highest to the lowest, each at his or her own pace, without a conductor.

George Martin, the Beatles’ producer, was no doubt horrified by the thought of asking these classically-trained musicians — many of whom were his personal friends — to do such a thing, purely from an artistic perspective. However, his pushback was not artistic but economic; he simply told John that EMI, the Beatles’ record company, wouldn’t pay for a full orchestra to play just 24 bars.

It didn’t matter that the Beatles were the most profitable property on EMI’s roster — or even in the world — at the time. From the record company’s point-of-view, Sgt. Pepper would sell just as many copies with or without hiring a full orchestra for the sake of 24 bars on one song.

John was flummoxed, but Ringo Starr provided a solution: Why not bring in half an orchestra and have them play twice? So, that’s what they did. The rest, as they say, is psychedelic history.

“The cost-of-goods conversation is always a challenge,” says Donna J. Sturgess, VP of innovation at GlaxoSmithKline, in the July/August issue of The HUB Magazine. “There’s always someone who will say that you could sell just as much without spending the extra money.” Donna found herself up against such challenges as she and her team developed Aquafresh Extreme Clean, a new entry in the ostensibly mundane toothpaste category.

Donna knew that success depended on creating a different kind of toothpaste — one that would provide a decidedly different experience versus Colgate and Crest, the category’s leaders. As the third-place player, Aquafresh was in a bind. If the brand didn’t start to sell better, it was in danger of losing its place on retailer’s shelves altogether.

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The difference started with the toothpaste itself. Finding a flavor that wasn’t mint and a formula that created more foaming action may not have cost anything extra (or at least was not necessarily the kind of expense that would come under immediate scrutiny). Engaging engineers to design a cap that closes with a “click” (instead of the usual flip-top or screw-cap), however, started to push things.

When Donna insisted that the carton be made of plastic instead of paper (both so that it would stand out in-store while also building more excitement — and loyalty — among consumers) she really had to fight for it. She comments: “There’s always internal tension over ‘why can’t you do it cheaper?’ This product went through as much rigor as any new product launch with a bit more challenge around some things that you can certainly tell cost more money. But the result is that Extreme Clean, in some respects, is the growth part of the Aquafresh brand.”

Donna’s success story would certainly seem to be the exception rather than a rule in today’s marketplace — where most brands are obsessed with cutting costs and infatuated with measuring each incremental expense against each incremental return on investment. That she prevailed in a corporate environment is especially noteworthy; usually it’s independent entrepreneurs who try to break the mold by breaking the bank.

Intelligentsia Coffee, for example, is carving out a niche for itself by paying coffee growers a premium based on the quality of their crop. The company’s founder actually says he’ll pay as much as a 200 percent premium for beans meeting certain quality standards, on the assumption that consumers will pay $20 or more a pound at retail for it. EV Rental Cars has found a profitable niche in renting hybrid cars even though it means paying full retail prices for the autos it rents. The big car-rental companies wouldn’t dream of doing such a thing because their business models are premised on buying fleets based on volume discounts.

A few other big-name brands seem to be catching the spare-no-expense bug, however. Atari, for example, is actually turning its excessive ways into part of its marketing strategy. The videogame maker’s VP of marketing, Nique Fajors, actually brags about how late he is with the introduction of Test Drive Unlimited, an online racing simulation videogame created for Microsoft’s Xbox 360 console. As he told The New York Times: “From a product quality standpoint, you should know that we have delayed the game four times.”

And, of course, time is money. While Nique says Atari would have loved to have launched the new game sooner to get some revenues going, he explains that “the viewpoint is that we will ship it when it’s ready and not before, which is what is done for all the truly great products.”

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Toyota is also paying any cost and bearing any burden to ensure that its customers are happy with its cars. The strategy centers on issuing vehicle recalls early and often — often before consumers even know there’s a problem. On top of the inherent expense involved, Toyota also gives its dealers as much as $3,000 per vehicle to fix problems that occur post-warranty, according to Forbes magazine. The result of such expense is that “vehicles jump off the lot because consumers swear by their quality.”

If there were a crown for spending more to make more, it would probably rest on the head of Gamal Aziz of the MGM Grand Casino. Gamal has created a process he calls “working backward,” as reported by Paula Kihla in Business 2.0, which effectively shifts the focus from how much money is being made to how much could be made.

Gamal first “breaks down an operation into constituent parts, then calculates the maximum potential revenue that each business or space could generate in a perfect world — that is, if every customer spent the most the market could bear and if traffic reached its physical limits.” He then “subtracts actual sales from that hypothetical number and calls the difference a loss, even if the venue is making money.”

By “working backward” Gamal managed to persuade MGM’s board of directors that the $2.1 million in revenues it was realizing on its Gatsby’s restaurant was really a $3 million loss on “potential” sales. His remedy was extreme — he blew up and re-built the ostensibly profitable restaurant, which promptly exceed expectations by generating $6.5 million in sales.

So, the next time a bean-counter tells you that spending extra money won’t result in any extra sales, consider telling them that it’s not just about sales — it’s about growth. Real growth requires the kind of innovation that gets customers excited, and that kind of innovation often means just putting a crowbar in it.

Heck, even the staunchest budget hawk understands that you can’t cost-cut your way to growth.

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And if that doesn’t work, tell them Ringo sent you.

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