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Comment by pembrook | Hacker News Reader

Rule #1 of business:

You can generate revenue to infinity, but you can only cut costs to zero.

This alone means that a bias toward frugality will probably cause you to spend time on the wrong things. It's the equivalent of a freelance developer who charges $100/hr spending 5 hours on Amazon trying to save a couple bucks on an iPhone cable. Cool, you saved $3. But you spent $500 to save it!

Of course, if you haven't found product-market fit, frugality can help give you more time to find it. But once you have a proven business, frugality is a death sentence. While you're trying to save $20/month on your email marketing tool and $50 on cheaper coffee for the office, your competitors will be spending their time and money to acquire your customers.

Generally, you get what you pay for. So if your gut is to always pick the cheap option, you're going to be using bad tools and hiring bad people, and creating bad products.

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There's another useful way to look at this mathematically and practically: survival time. If you cut costs to nearly zero, you can survive nearly infinitely.

There are plenty of small companies that serve a small market and last for decades by being careful about spending. That doesn't mean scrimping on coffee, but it means not paying $20k for a stylish sculpture for your office reception or $2M for a beach concert with the hip artist of the day.

The exact same thing applies to personal finance. Often, working towards making a lot more money is the fastest way to get rich, rather than spending a lot of time eliminating small costs (e.g. cheaper coffee). However, for a typical person, eliminating big costs such as expensive luxury cars makes a big difference. If you want your money to last, you need to be frugal relative to the scale of your assets, revenue, and growth.

There’s another way to look at it too: a waste of time. If what you enjoy is lowering costs for the sake of it, living an extremely minimalists lifestyle, and focusing all your energy on finding ways to avoiding spending money then good for you. But for the rest of people? Probably a waste of time. And most individuals will never accrue the level of wealth necessary to live a FIRE life. After all, you can’t actually reduce your costs to anywhere close to $0 in the US. Healthcare, food, shelter, and more can cost a lot. God forbid you want to live a somewhat normal life and have children who grow up with some normality.

The post above is explicitly not advocating attempting to cut costs to $0, but to consider survival time when evaluating expenses. The extreme example is just useful for projecting an intuition of the relationship between spending and survival.

Same as how "You can generate revenue to infinity, but you can only cut costs to zero." shows the edge cases to build the intuition.

>There's another useful way to look at this mathematically and practically: survival time. If you cut costs to nearly zero, you can survive nearly infinitely.

Only if you don't enjoy doing things like eating food and living indoors.

You are needlessly missing the point. GP is referring to a tradeoff between cost and survival time, a continuum.

Obviously businesses and individuals cannot really reduce costs all the way to 0.

The point is that you need to count time spent by the founders as an expense. Roughly somewhere between 15-20k per month per founder. Even if you're surviving by eating ramen in your parents basement there's still an opportunity cost from not having a job. You have to account for it.

I’d argue that most people absolutely should not account for it. There’s enough to stress out about when trying to get your startup off the ground. The idea that your “spending” 2Ok a month due to opportunity cost is not helpful and probably likely to lead to burnout. On the other hand, saving a little money and knowing you’ve extended your runway an extra 3 months can be very helpful.

knowing where to spend and where to cut is very important

I feel like this is the popular sentiment these days but I don't fully agree.

I've seen so many companies spend themselves to death and its easy to have it happen much faster than anybody in charge realizes.

I've also seen companies grow expenses as things go well and suddenly there's a massive downturn in the market and they can't recover in time. Meanwhile, more frugal companies have the runway to weather unexpected events.

So I still think there's more value in frugality than is generally accepted.

frugality but not cheapness

You clearly have never pushed a company towards profitability because the fundraising markets are closed to you.

Generating revenue is the hard part in business, spending is really, REALLY easy.

I think the crux of OP's opinion is, "it depends". If you can easily save a couple hundred dollars a day and are bootstrapped, do it. Otherwise, it may not be worth it in the grand scheme of things. Thus, no one size fits all, but one size can fit most.

I'm not saying the alternative to frugality is to spend your way to death.

But it's important to remember, if generating revenue is so difficult, you don't have product market fit or even a business then.

Pinching pennies is only valuable in the sense that it can extend your runaway long enough so you can find product-market fit.

It's not a means to an end by itself.

Irrational frugality is pretty much the default impulse of all American software engineers (and the entire HN crowd), so I don't think HN needs any more encouragement to be frugal.

It takes money to build up revenue and get new clients, this are typically called the "customer acquisition cost" or CAC.

The time it takes for a customer to pay back this initial CAC is called the "payback period" which can be 1 month or 10 years. The longer the payback period is, the more investment you need to bridge the gap. The business may be super-profitable from a unit-economic point of view, but from a cashflow point of view is a nightmare.

Businesses with long payback windows are very common, but if the theory is that a customer stays for 7 years and you are in the 3th year of your startup, you will have to convince investors that this is true which depending on the fashions of the year they will lean towards true or false.

That's one important point, the other point you mis is that fixed costs cannot be avoided and don't prove anything vs. the viability of your business. A good example is accountancy costs, office costs and hardware for employees... it's a must to pay for these things but every business needs them but they don't generate revenue.

Pinching pennies is a very healthy habit because again, everybody wants you to spend money (on them).. that's everybody's business model. Getting a client to spend money on you and getting enough of them to cover the variable and fixed costs is the real litmus test whether you have a viable business.

There are examples of irrational frugality that we can agree on like hiring a zoo of interns that then take up all your attention to manage and train but then immediately quit once they actually get some experience.

Another example is hiring 3 junior devs that can't match the output of 1 senior dev for a combined cost of 1.6 times the cost of the senior dev.

Either way, frugality is a good thing but obviously you need to make the money that you do spend count.

Curious - what startups are looking at the kind of time horizon for getting their customer acquisition cost back? That seems like an idea that investors would not want to pour their money into unless it’s an incredibly sticky market... in which case, why would they switch to you and not a competitor shortly after you paid for their business...?

Spacex and Tesla come to mind.

I think we're saying the same thing.

I'm coming at it from the perspective of the irrationally frugal (a common problem I see on HN and how engineers typically behave even when they've found traction).

You're coming it from the angle of the irrational big spenders (VC-funded stuff you hear about in the media ie. WeWork, etc.).

We're both saying: be ruthlessly rational with your time and money.

However, I think a bias towards spending (vs. irrational frugality) is actually much more rare than you think. Everybody knows about WeWork, but they don't hear about all the engineers who spent 6 months optimizing their AWS bill to save $500 when they hadn't even found product-market fit yet.

This, 100% agree.

Developing a tech startup is hard, and 90% of the costs are usually in labor (real or opportunity cost if you are working "for free").

Trying to save a few bucks each month when you are paying engineers $10K+ per month just doesn't make sense. Many engineers are also not good at thinking in "analog" (vs digital) and obsess on things that just impact the wrong thing.

Those comments about people using a couple $100s for monthly SaaS service a few months ago baffled me. The real question is: do those multiply/improve the output of your most scarce resource?

Saving a couple $1000s per year is good all else being equal, but in the end it's creating $100,000s more that matters in business.

Focus on the right order of magnitude.

Yeah the key to having the penny pinching DIY approach pay off is to have your time already close to zero. Then you can take as long as you want to perfect your CI/CD pipeline and loading screens, they will all pay for themselves in the end.

> You can generate revenue to infinity, but

If this were true, everyone would do it. This isn't, actually, true at all.

You might say "in theory," but there is a finite amount of money, most of it isn't available, and of what is, most of it won't be interested in any single thing

Besides, more importantly, in practice, you can't just generate revenue. At all. Generating revenue takes the investment of work and money.

All you're doing is failing your null hypothesis using stories.

I can name a startup whose founders talked like you.

They burned more than $50 million in about four years. But they were always talking about how you can just scale revenue, so they needed to spend everything they had to scale sooner.

They had a staff of almost 150 people.

They never had 150 concurrents on-site.

They'd still be searching for product market fit today if they had had even some remote frugality. They'd probably have found something by now.

Worked for a company like this in the first dot-com boom. VC funded. Spending money like mad. Lavish offices. Big sales staff. Top-of-the-line Sun servers and Cisco networking gear. It was all focused on being ready to scale. Never had one paying customer. When the last funding round didn't materialize, the burn rate killed them in a matter of weeks.

But you're only describing poorly executed / counterproductive frugality.

Spending $500 of time to save 10 bucks isn't frugality, it's idiocy.

Spending time reducing unit cost as opposed to customer acquisition or building features might be a different discussion, especially if the next marginal customer acquisition starts bumping up against your cost of services/product.

> Spending $500 of time to save 10 bucks isn't frugality, it's idiocy.

I could also argue my point about not being frugal doesn't mean "spend irrationally," but I think we're just arguing semantics in no true scotsman fashion.

> ...charges $100/hr spending 5 hours on Amazon trying to save a couple bucks on an iPhone cable. Cool, you saved $3. But you spent $500 to save it!

I agree in general with the sentiment that people need to really value their time more than they do. It is a precious ever-depleting resource. That said, we mustn't discount the fact that:

1. One may get better at saving and wouldn't always have to spend 5 hours on Amazon when looking for better deals the next time around.

2. It is not just $3, but might also be that one is learning along way (reading reviews, getting better at identifying quality signals, etc).

3. Developing a habit because every buck one spends could have been saved for (future frugal expenses), because not every waking hour is worth $100 anyway.

4. Valuing all of one's time in terms of billable-hours could be actually used to justify not doing anything else at all; and life/learning/experiences would simply flash-by.

The thing you're missing here is that big upsides are low probability, and reduced downsides are high probability. Swing big, and you might be the guy that knocks it out of the park, but you'll probably be the guy that gets struck out, whereas the guy hitting the ground ball might not get a grand slam, but he's got a good shot of getting on base.

I suspect that the expectation value of cutting costs is going to be higher, but with a much lower variance.

> a freelance developer who charges $100/hr spending 5 hours on Amazon trying to save a couple bucks on an iPhone cable. Cool, you saved $3. But you spent $500 to save it!

Only if you have more work lined up than time to do it. Otherwise it's just another part of your day, that was never going to earn money.

I'd argue if you don't have the work the time would be better spent getting the best client than saving three dollars.

Seeking a client's still work though, nobody's working all the time. At least, if you're reducing sleep so that you can spend more waking hours on billable work, you should probably take a step back!

And I assume the starting point, 5h on $3, was an exaggeration. There's time for saving money, and there's money that's worth the time to save. My point really is that 5h doing non-work hobbies, spending time with family, or whatever, isn't a 'cost'. Not even necessarily an opportunity cost, since for that there had to be abundant supply, that doing it now doesn't mean you're not doing it next week, that there's always more already lined up 'for free'.

First of all, who said this is the #1 rule of business? Lol. Did you write the only book on business? Are you Steven P Jobs?

Secondly, revenues can't go to infinity. Not only is infinity an uncountable times bigger than a Googol, but market sizes are limited. Organic growth is limited.

It is much easier to cut costs than increase revenue in business. This is why most large companies prefer to cut costs rather than invest in innovation.

The best entrepreneurs are frugal. Warren Buffett is famously frugal and prefers to invest in frugal entrepreneurs. To the point where Buffett once bragged about investing in an entrepreneur who was so frugal he resorted to counting the sheets of toilet paper at his business because he thought he was being cheated (he was).

It depends on the company and how detached the money people are.

In my experience, companies with full closets of office supplies and lots of stuff don’t last. Exception: when investors are plowing unlimited cash.

First rule of procurement is to get 3 quotes and second is to buy intelligently. Engineers shouldn’t be buying cables, and if you just buy the first thing you see, the pennies you miss add up. It also avoids putting you in the position where you’re firing a valuable engineer because he’s buying stuff inappropriately to accumulate loyalty points or helping out a friend selling stuff, etc.

Frugality doesnt equal stupidity. Of course a frugal person doesnt spend an hour trying to save $5.

Being frugal and priorizing business spending and time are not contradictory. Frugality is about spending less while getting the same value.

>Of course a frugal person doesnt spend an hour trying to save $5.

I think you may underestimate how, for many people (including well-off ones), getting a "deal" becomes the objective in itself.

> Of course a frugal person doesnt spend an hour trying to save $5

Have you ever seen a reddit thread on any personal finance related topic? You can find millions of people who regularly defy this logic every single day.

> You can generate revenue to infinity, but you can only cut costs to zero.

You can also increase costs to infinity. Frugality doesn't have to be about cutting down on costs that already exist.

Partial disagree. Pay for good people to make the most out of the tools available. If there is something you need that would improve revenue then get it when it becomes clear but don't just buy top tier X because. Start-ups need as much runway as possible if things dip until the business model is sustainable.

Edit: Even if the business looks sustainable just wait till a disaster like covid comes by and rocks your supply chain and your customers prioritize other expenses.

It's the "proven business" part that will kill you.

Penny-wise, pound foolish.

Absolutely true, thanks for sharing

It is not always revenue vs. cost, there is also a time factor. Being frugal might help staying longer in business, it doesn't matter what the competition are doing, not everything is a zero sum game and sometimes success come because of some event and if you are there to capitalise it you might succeed, like what happening these days with messaging and twitter like apps. So it is all a matter of balance and there is no one way to do those things.

"While you're trying to save $20/month on your email marketing tool and $50 on cheaper coffee for the office, your competitors will be spending their time and money to acquire your customers" - How if they are wasting their money as where you are saving? Wouldn't it give you more resources to go after their customers?

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