Risk vs. Reward: Things to Consider When Making Smart Business Decisions
This post was prompted by an email I received today asking for my definition of risk in life and business. I must confess that I had to sit and ponder this for a time. The simple answer I came up with was “risk versus reward.”
Those of us who served in war zones know what risk vs. reward is first hand. If you can keep risks to a minimum then the reward is you live to fight another day. In this article I want to explore how to keep risks in your business at a level that the business will live, grow and improve.
What is business risk vs. reward anyway?
It’s not the risk itself that’s important; it’s the level of risk we choose to accept to realize the reward. Let’s assume that I buy a lottery ticket for a dollar. I am risking one dollar in the hopes of winning $600 million dollars. So even though the odds of winning are high, the “possible” reward of $600 million dollars outweighs the risk of losing the single dollar bill.
How much would I be willing to risk for that $600 million dollar reward … $5, $50, $100? As you can see at some point the risk will outweigh the reward. Best-in-class businesses are very good at locating the stopping point and staying in the black. All businesses are different but there is a point each of us will not go beyond to be successful.
Common risk vs. rewards in business
- Expense vs. Investment: Advertising is most certainly a risk vs. reward proposition. One of the important points I express in my seminars is, “Advertising must be an investment; it can never be an expense.” My rule is, “Never advertise anywhere unless there is at least a 75% expectation that it will produce more revenue than it costs.” The increased business reward from the risk of paid advertising must outweigh the monthly cost.
Advertise to the wrong people or in the wrong place and you suddenly have an expense, not an investment. According to the Direct Marketing Association, a good direct mail campaign, to the right customer, would only need a 2-3% response to be profitable. What? Ninety-eight percent of the people don’t do business and that’s a success?? It is.
- What about employees? Here is a major risk vs. reward situation. Good employees are worth their weight in gold. But one bad one can do major damage to your reputation or your business image. Larry Bowman, Owner of Owenhouse Ace Hardware in Bozeman, Montana has a great hiring philosophy. “Hire for attitude; train for skill.” “If I can find the right person training them is easy.” Must be why he has below industry turnover and a waiting list of people who want to work there.
- Products and services: What products to stock and what services to offer. How many widgets should I keep on hand? How large an area can I service and still be profitable. Should I do repairs? Free delivery? Credit? Risk carrying the wrong products or offering the wrong services and your reward is lost business and customer abandonment.
Look Backward to Move Forward
Sit down and examine your last year’s business. Which areas did well and which area’s didn’t? Try to find the top five things you do most profitably. If you are a hardware store and you are the choice of local contractors then perhaps power tools and lumber products would be one of your five areas. If you are the remodeler’s choice then paint, drywall and paneling might be your strong suit. Carrying the wrong products or offering the wrong services will put you on a slow death spiral to business failure.
Some Final Thoughts
Sometimes you are just going to guess wrong. Accept it and learn from the experience. Don’t put all your money on the long shot every time. But now and then you just might get lucky. Learn from every experience. Why did that ad work so well? Why did the other ad not work?
Refine the demographics of your ideal customer regularly. Are they getting older, younger? What businesses are moving to town and which are leaving? Border’s Books, Linen’s and Things, Mervyn’s, Montgomery Ward, Circuit City are all gone because they were unable to adapt quickly enough to changing customer habits and business conditions.
Those businesses with visibility, and a good business model will emerge with a larger customer base and a stronger business. Don’t be afraid to take the risk. As Davy Crockett once said, “First be sure you’re right; then go ahead.”