Small businesses are the backbone of the German economy; 99% of the country’s companies are small or medium-sized enterprises (SMEs). In recent years, these SMEs have experienced sharp cost increases—as evidenced, among other things, by the historic increases in producer and consumer prices since the COVID-19 pandemic.

To compensate for cost increases, businesses have two options: either they can raise the prices of their products and services and pass the costs on to customers, or they can increase their cost efficiency.

In this article, we’ll discuss what cost efficiency means and why it is so important for businesses in Germany. We also explain how businesses in Germany can reduce their costs and provide practical examples of cost efficiency.

What’s in this article?

• Cost efficiency: What is it and why does it matter?
  
• Why is cost efficiency so important for businesses in Germany?
  
• What strategies are businesses in Germany using to increase cost efficiency?
  
• Ways to increase your business’s cost efficiency
  

Cost efficiency: What is it and why does it matter?

The term cost efficiency describes a business’s ability to use its available resources—such as capital, time, personnel, and materials—in such a way that the greatest possible benefit is achieved with the least possible effort. Cost efficiency does not mean saving at all costs, but rather systematically optimizing the ratio of effort to result.

Cost efficiency is a key business principle that is playing an increasingly important role in Germany’s economy due to rising energy prices, global competitive pressure, and growing demands for sustainability.

The importance of cost efficiency in practice

A business is considered cost-efficient if it can provide high-quality products or services with minimal expenditure of resources. It is important that the effort invested—for example, in the form of working hours, machine running times, or raw material costs—is at a reasonable ratio for the result. The latter can vary depending on the industry; it can include sales growth, improved customer satisfaction, increased production volume, or an innovation advantage.

Using resources intelligently

With their numerous “hidden champions,” medium-sized businesses in Germany are excellent examples of the balancing act between quality and profitability. Cost efficiency is increasingly becoming a strategic success factor, especially in industry, which is known for its precise manufacturing, high quality standards, and export-oriented structure. In view of demographic changes and the shortage of skilled workers in Germany, among other things, it will be extremely important to use existing resources as intelligently as possible in the future—such as through digitalization and process optimization.

Why is cost efficiency so important for businesses in Germany?

Below are the key reasons cost efficiency is important for businesses in Germany.

Competitiveness

Germany is a high-wage country, meaning its businesses often have to pay relatively high wages, social security contributions, and taxes compared to those in many other countries. To compete effectively with foreign businesses that have lower production costs, businesses in Germany must operate more economically. Cost efficiency helps compensate for structural disadvantages without compromising on the quality of products or services.

Profitability

One key benefit of cost efficiency is its direct impact on a business’s profitability. If fewer resources are used while revenue remains the same, profits increase. These profits can then, for example, be invested in the development of new markets or in further measures to increase efficiency. With the latter option, a positive cycle is created—higher profits enable further investments in improving efficiency, which, in turn, lead to even better results. Cost efficiency becomes the basis for sustainable growth and long-term economic success.

Capacity for innovation

Businesses that increase their cost efficiency create the financial flexibility to act in a future-oriented manner. Instead of investing resources exclusively in ongoing operations, they can further develop their businesses. They can invest specifically in research and development, as well as new technologies and business models. Cost efficiency is therefore not the opposite of innovation—in many cases, it is a prerequisite.

Crisis resilience

Recent years have shown how vulnerable global supply chains and economic planning can be to crises—e.g., pandemics, geopolitical conflicts, or volatile energy prices. Cost-efficient businesses ideally have lean structures and clear processes that enable them to respond quickly and flexibly to external challenges; thus, by becoming cost-efficient, they indirectly improve their crisis resilience.

Sustainability

Cost efficiency is increasingly linked to ecological sustainability. Businesses that use energy or raw materials efficiently not only reduce costs but also reduce their ecological footprints. In times of growing social responsibility and strict environmental, social, and governance (ESG) criteria, this is not only good for a business’s image, but also for investor and customer loyalty.

What strategies are businesses in Germany using to increase cost efficiency?

In August 2024, the Boston Consulting Group (BCG) published the results of a survey on cost efficiency. A total of 770 CEOs, CFOs, and COOs from 21 countries—including 50 executives from Germany—provided insights into their businesses’ cost optimization measures.

The respondents from Germany considered “nearshoring”—i.e., the relocation of production and processes to a nearby foreign country—the most effective method for reducing supply chain costs. A second method was negotiating better terms with suppliers. When asked what operational measures they would take to ensure competitive costs in the future, decision-makers in Germany primarily favored three options:

• Investments in partnerships and alliances (66%)
  
• Relocating to cheaper regions (56%)
  
• Outsourcing certain tasks or processes to external service providers (52%)
  

A majority (64%) of respondents also stated that artificial intelligence (AI) will make a significant contribution to medium-term cost targets over the next 1.5–3 years. Furthermore, 58% are certain that AI will be key for operational efficiency in the next 3–5 years.

Ways to increase your business’s cost efficiency

Since relocating to another country would represent a huge disruption for many businesses in Germany, it can be easier to outsource certain measures using service providers in other countries. Below are some examples of ways to increase your business’s cost efficiency, with a focus on outsourcing services.

IT and cloud infrastructure

It requires considerable resources for businesses to operate their own IT infrastructures and business-owned servers. By outsourcing to specialized service providers, businesses can move their infrastructures completely or partially to the cloud. Many service providers offer scalable, secure solutions for hosting, data storage, and virtual workspaces. Ideally, businesses only pay for the resources they actually use.

Payroll and financial accounting

Small and medium-sized businesses in particular benefit from outsourcing their payroll accounting and ongoing financial accounting to specialized firms or service providers. They save a lot of time and money on internal specialists, training, and software. Digital providers enable automated processes that tax advisors can normally access easily.

Periodic accounting

One particularly innovative approach in the field of digital accounting is the use of Stripe Revenue Recognition. This solution automates periodic transaction posting—which is often an error-prone and time-consuming process. This automation allows revenue to be recorded in accordance with the law, provisions to be calculated correctly, and monthly closing to be significantly accelerated. This not only reduces the risk of accounting errors but also saves valuable working time.

Payment processing

Another example of cost efficiency is the use of Stripe Payments—especially for businesses that want to expand, and therefore must rely on flexible payment infrastructures. With Stripe Payments, businesses can accept payments worldwide and offer their customers locally preferred payment methods. Payment processing is automated and can be seamlessly integrated into existing shop or enterprise resource planning (ERP) systems.

Tax processing

An additional cost efficiency strategy, particularly for international businesses, is automated tax processing. Stripe Tax automatically calculates country-specific tax rates, levies them correctly, and provides all necessary documents for tax refunds or audits. This reduces risks by ensuring compliance with legal requirements, and it relieves the burden on accounting. In general, automated tax-filing can reduce costly errors that come with the manual filing process.

Customer support

Outsourcing customer support can be particularly worthwhile for fast-growing businesses. External call centers and chat services take over customer support via clear service level agreements (SLAs). Modern providers work with multilingual teams, 24/7 availability, and chatbot integration. The costs per contact are significantly lower than they would be for an internal team—while at the same time ensuring high accessibility and customer satisfaction.

Content creation and marketing

For many businesses in Germany, it is not economically viable to build up in-house resources to create and market content. Specialized agencies and freelancers can design and publish social media posts, for example, in a much more cost-efficient way. They can also be commissioned to manage comprehensive advertising campaigns or maintain online presences.

Logistics

For retail businesses that store and ship their goods, outsourcing warehousing, picking, and shipping is another example of cost efficiency. Businesses save on storage space, personnel, and technology, while still guaranteeing fast delivery times and transparent shipment tracking.

Recruiting

The search for skilled workers and applicant management takes up a lot of time internally. External personnel service providers can take over recruiting, the pre-selection of suitable candidates, and in some cases, even the entire onboarding process for businesses. This can significantly increase cost efficiency.