As entrepreneurs, we make lots of decisions. Some of these decisions will help our business grow and prosper, others may lead to unexpected consequences. It’s just part of the life of an entrepreneur.
We all develop our own style of decision making. Some of us make decisions quickly, often trusting our gut instincts. For others, the process is more drawn out.
In all cases, either consciously or sub-consciously, we do some sort of risk-reward assessment. If someone tells us to jump off a bridge, we’re going to assess the potential impact of this action. If I do this what might happen. We weigh the pros and cons and make our decision.
Believe it or not, most of us are pretty good at doing this.
So why is it that some people just seem to make all the right decisions, while others come face to face with the law of unintended consequences?
This law comes into play if our analysis of the current situation is faulty. People that are consistently good decision makers challenge underlying assumptions before deciding what to do.
Take the bridge example. Let’s say the bridge spans a river. All afternoon you and a friend have watched local kids jump off this bridge (it’s about a 10-metre jump). They all seem to be having a great time. They jump, briefly disappear into the water, come up for air, swim to the shore and climb right back up. Your friend assesses the situation and decides to jump. She’s fit, a strong swimmer and likes to get an adrenaline rush now and then. The big risk would be rocks under the surface, but your friend assumes that won’t be a problem. After all the kids have been jumping all day. You’re not so sure. You walk over to one of the kids and ask about rocks and get the following reply. “Yes, there are lots of rocks. The key is to aim to land about 3 metres to the right of the centre of the bridge. If you land there you’ll be fine.” So, what was the problem with your friend’s decision?
The assumption she made about the lack of rocks was incorrect. It might have worked out, but there was a big chance of an unexpected consequence.
So how do we avoid the law of unintended consequences in business? You have to discipline yourself to challenge the underlying assumptions. Just because you perceive something to be true does not make it true. Here are three common assumptions business owners make that can lead to bad decisions.
I’m not selling enough so I need to reduce prices
This is a very easy trap to fall into, especially if we have a lot of window shoppers (literally or figuratively). These are the people that come into our store, or phone or email asking all sorts of questions about our product and service, but ultimately don’t buy anything.
If we ask them why, the two most common replies are “it’s a little out of my price range” or “it looks nice, but I just can’t afford it.” The problem is that most of the time that is not the real reason. It’s just an easy answer that stops the conversation. If you have a lot of window shoppers, it almost always means that you’re attracting the wrong types of customers. People that don’t value the things that make your product or service special.
In most cases dropping your prices won’t convert these window shoppers to customers. It just means that the people that do value your product or service will pay you less. In my experience, when a small business drops prices, it usually results in reduced sales. If you’re not selling enough you need to figure out why, and then make a plan to increase sales.
I’m happy with my business just the way it is
One of the basic laws of life is that nothing ever stays the same. This is certainly the case for a business. A business that is not growing, in some capacity, is in decline. From time to time we’ll meet an entrepreneur that challenges this assumption- typically a business whose revenue has flat-lined for a few years. Sales are steady, cash flow is steady, and the owner is happy.
The mistake is looking at the performance of the business over a short period of time, say 2-3 years, through a single lens, such as revenue. The world is filled with entrepreneurs that have been fooled into thinking their business has reached its equilibrium, a point where things will just keep on going as they are. This is never the case. Long-term trends always emerge, and if a business is not planning for growth, those trends are usually downward.
An owner whose business decision-making process is based on the assumption that nothing much needs to change, will come face to face with the law of unintended consequences, and sooner than they think.
I’m not making enough money, so I need to sell more
Many of the entrepreneurs I have worked with reach out to us because they’re not making enough money. They know they have a great product or service, their customers are loyal and happy, they’re working really long hours, and somehow at the end of the day, there’s just not enough cash left over to pay them a fair market wage. In a situation like this, it’s easy to assume that the problem is not enough sales. And sometimes this is the case. But there can be all sorts of other reasons, especially if you’ve been in business for a few years now.
One thing I do know; if you have a great product or service and you’re working really hard, you should be making money. Before looking at sales, you need to take a step back and look for opportunities to improve profits. Maybe your wage costs, expressed as a percentage of total sales, are well above industry averages. This can happen if you keep staff around, even when there isn’t enough work to keep them busy all the time. Or, and this is a really common problem, you may be underpricing. If this is your problem, a push on sales can actually make the situation worse.
For many small business owners, having the freedom to make our own decisions is something we truly value. I’m a rapid decision maker, and I used to assume that this was a key entrepreneurial trait.
I’ve come to realize that this isn’t the case. You can’t be afraid to make decisions, but in my experience the people that make consistently good decisions are the ones that challenge assumptions and have learned to minimize the risk of unintended consequences.
By Denise Alison