Every business decision is a choice about how to use a resource. You have a finite amount of time, people, tools, and cash. Use them well and you thrive. Use them poorly and you stagnate.
It comes down to a simple choice: I could use this $100 thing for project A or project B. Both are worthy goals. But project A makes $100 and Project B makes $200. Choose A and your company goes nowhere. Choose B and you have more of that thing to use for another project.
This idea combines two economics terms:
- cost of capital – what does that project really cost if you figure all the things you use to pull it off
- opportunity cost – what opportunity did you miss because you were using all those resources on project A instead of B
It’s really hard to do this math. It’s easy to ignore the real work that goes into a project — the support staff, the tech, the time, the details. It’s easy to get excited about a new idea, and no fun to think about how that new idea isn’t going to bring in as much cash as something less exciting (especially something you’re already doing).
Entrepreneurs face these questions more often than they think:
- Delegating: The cost of a senior/expensive/limited-resource person doing work someone else more junior could do
- Choosing a project: Picking between two activities, with the same time/resource cost, and picking the one that returns more for the same effort (especially when one is new, exciting, or fun)
- Picking the big customers: You spend the same sales effort to reach a buyer with a small or big wallet — you’ll close the sale either way, but end up with less
- Selling to existing vs. new customers: You get the same revenue per sale, but the the new customers have a much bigger burden of sales effort and setup costs, producing less profit
- Creating new products vs. reselling existing products: New products always return less to the bottom line until you recover your development costs
- One-time vs. recurring sales: Offering products that renew automatically (subscriptions) reduces sales effort/cost dramatically for the second and future sales
- Killer customers: Some customers cost more to serve than you make from the sale, eating the profit of the ones who cost the least to serve — segment buyers carefully and walk away from the ones that destroy profit
- Trouble employees: Two employees with the same job, but one takes management time with constant personal issues — costing the company resources and demoralizing high performers who see the troublemaker being rewarded with time and attention, while performers have to pick up the slack
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Andy,
This is a great piece of work. Mature entrepreneurs can identify when they are engaged in activities that produce positive results, it becomes instinctual. I wish there were some way to hasten the development of this instinct, but truly I think the entrepreneur must fail through a few misdirections unless they have a mentor who guides them well. They must be willing to hear the feedback however, and many, if not most, will not be ready to learn before a few mistakes occur.
That’s my experience; my two cents!
George Seybold
So very true Andy. And I find, the bigger the businesses the less they seem to remember this simple lesson.