I was recently re-reading Ramit Sethi’s book, I Will Teach You To Be Rich.
I love re-reading good books. I always find something new or something I missed on my first reading or that now has a completely different meaning for me.
Does the same thing ever happen to you?
Anyway, I was reading a chapter where Ramit talks about the differences between frugal and cheap people from a personal finance context. This was a great approach.
By the way, if you don’t know Ramit, he teaches people how to achieve a “rich life” (not all about money) by applying behavioural psychology.
Frugal and cheap people have 2 different ways of approaching almost everything. Cheap people care about the cost of things, frugal people care about the value of things.
Cheap people’s decisions affect those around them. Frugal people’s decisions affect only them.
If you want to get a more accurate idea of this, I’ve added a video where Ramit explains this in depth. Check out the video below.
[responsive_video type=’youtube’ hide_related=’1′ hide_logo=’1′ hide_controls=’0′ hide_title=’1′ hide_fullscreen=’0′ autoplay=’0′]https://www.youtube.com/watch?v=O9nwHrqosD8[/responsive_video]
I can see how I was a “cheap” person just a few years ago — and to be honest, I still have my cheap moments.
But the truth is that I moved over to the “frugal” side in the past few years – and it’s made a huge difference in my life.
That’s cool – the title of this post referred to differences between frugal entrepreneurs vs cheap entrepreneurs.
Why am I talking to you about personal finance? Well, because this is not actually about personal finance – it’s about mindset.
After reading Ramit’s book, I realised that I’ve applied the Cheap/Frugal mindset to my entrepreneurial life as well. And my results have been dramatically different.
The basic principle is exactly the same: Cheap entrepreneurs care about the cost of everything associated with the business; frugal entrepreneurs care about costs (obviously), but they focus on value and are open to spending more —or a lot more— on what they really care about.
What’s the difference?
The cheap entrepreneur will always seek the lowest price on everything: their accountant, web hosting, laptop, staff, client acquisition, and so on. As a result, they have a cheap business.
Frugal entrepreneurs always find a way to get the lowest price – BUT, because they are focused on value, they are open to paying a lot of money for things that make the business more valuable.
That’s a huge difference.
How I chose my accountant with a cheap mindset
Let me give you some context here. One of the earliest decisions, when you set up your business, is hiring an accountant.
When I was doing my research to find my first accountant ever, I was still living in Spain. This was before I moved to the UK. My English wasn’t great.
My first option was to find an accountant in the UK who spoke Spanish and who would make my life easier. But soon, I realised that they were mostly associated with local accounting firms, and they just dealt with overseas clients.
In other words, they overcharged, but at least I could have a Spanish-speaking person helping me with my accounting.
What I did instead was to focus my search on local accountants – especially on cheap accountants.
The first accountant I hired even included the word “cheap” in their commercial name!
The result was that I dealt with them only via email, and had to ask the same questions many times just to be sure I was understanding everything.
I remember that my biggest fear was that I would receive a letter from the government notifying me of a penalty for having forgotten to complete document “Dumbs-P60” or something like that.
And then, my God! all my business would be ruined and my entrepreneurial career would be over.
All because everybody in Britain, except me, knew about the document Dumbs-P60.
I know that sounds stupid, but paying a cheap accountant who doesn’t give you the confidence you need is very stressful.
Now, I know how important it is to have a great accountant who deals with all my accounting and makes me feel secure.
My current accountant is much more expensive than the first one, but at least I don’t have to worry anymore. I know that if something happens, they’ll handle it without a problem.
Cheap entrepreneur accountant consequences: You have no peace of mind about your accounting. You can commit administrative irregularities, simply because you’re not sufficiently informed – in which case your cheap accountant will cost you far more money.
Frugal entrepreneur accountant consequences: Peace of mind, and trust from your clients, suppliers, staff and collaborators.
Obviously, I always want the best prices and to keep my business expenses under control – but accounting services always take priority in my budget.
QUICK NOTE: Document “Dums-P60” doesn’t exist, and I‘ve never been fined. Fingers crossed!
How frugal/cheap entrepreneurship mindset affects the clients you have
This is a good one – because cheapness and frugality are directly associated with our spending. But they involve a lot more than that.
The result of cheap or frugal business management will affect every aspect of your business, including your clients.
As I said before, a cheap entrepreneur always focuses on getting the lowest price on everything.
The cheap mindset works this way:
- I need money in. I need as many clients as possible.
- I am using free or low-cost client acquisition techniques (emailing free business directories, or buying a list of 5,000 emails for $50, or sending massive LinkedIn connection requests)
- I need to convert any lead I get – I don’t mind who they are, and don’t mind if I have to give them a discount or if I feel sure about the results they will bring.
The cheap mindset consequences:
- Clients who have 10 different proposals like yours in their inbox, and no differences among them but price.
- You deliver the wrong service, because these clients are not your target. Unhappy clients!
- Annoying clients send you a million emails a day and make you miserable.
On the other hand, frugal entrepreneurs focus on value, even if they are on a budget and can’t afford to pay the best business developer in the industry to get access to the best clients.
This is more about the approach. Let me explain:
- Cheap approach: I am hunting for clients. Once I have a client, I want to get paid, then jump to the next and keep hunting. I get a lot of one-time clients and I never stop hunting for new ones.
- Frugal approach: I am attracting and connecting only with the right clients. Once I have a client, I focus on delivering the highest possible value. I get lifetime clients.
When you focus on value, you don’t see your next client as prey. You see an opportunity to establish a real connection based on value and a long-term relationship where you can learn from their needs and problems.
Cheap entrepreneurs think short-term. Frugal entrepreneurs think long-term.
This is why a frugal entrepreneur looks for clients they can serve for the long term and deliver a tonne of value in the process.
They accept only clients for whom they can deliver high-quality results.
This makes me think of something I read recently in a great book by James Altucher. The sentence is: Your best future clients are your current clients.
I love the concept. It’s so long-term!
If you’re building a business around a content marketing strategy, “long-term” should be one of your mantras.
Cheap entrepreneurs build cheap businesses
The result of making every business decision using a “cheap mindset” is a cheap business.
Every business, small, medium and big, has a budget. But managing the budget is 100% your responsibility.
Choosing a cheap web-hosting provider sounds an acceptable choice for a local coffee shop with a few visitors per month who search for the nearest coffee shop in town.
But if they buy the cheapest coffee beans and haven’t replaced the espresso machine for years, then they have a problem.
If you are an online entrepreneur and you choose cheap hosting for your website, your visitors will leave your site because the speed is too slow or they’ll feel insecure paying you because you lack HTTP Secure protocol.
But you can drink the cheapest coffee on earth. Who cares?