Are You Spending $100 to Save $1?

Are you making business decisions based on the inputs or the outputs? You might be spending $100 to save $1.

Are You Spending $100 to Save $1?

Last week, I was talking to a friend of mine about interesting findings in retail psychology.

He told me about this study:

Many years ago, there was a fascinating study done on purchase behavior that asked participants to think about a movie they loved and wanted to buy (this was before the days of streaming and Netflix).

One group was asked to select either:

A) Buy the video
or
B) Not buy the video

A second group was asked to select either:

A) Buy the video
or
B) Not buy the video, and keep the money for other purchases.

In the first group, 75% of them chose to buy it. Only 55% chose to buy it under the second condition, even though there was literally no new information added.

Shouldn’t it have been obvious that in the first study, if they didn’t buy the video they could keep the money for other purchases? After all, it was their own money!

One of the fascinating things to me about this study is that it demonstrates how easy it is for us to get fixated on a single element of a decision, and how often that can be the wrong element.

In this study, it’s literally about forgetting that there are other ways to spend our money and that those ways might be better than the immediate purchase decision in front of us.

I often see something similar when I talk to companies who are working through the decision of whether or not to invest in growing their business.

I was working with a company who does $70M/year in sales. They were talking to me because they knew how important it was to get a sales process in place, upgrade their management training & provide their team with the right software and tools to tie it all together.

They estimated that in the most conservative case, if almost everything went wrong, that adding these components in would still give them a 2% uptick in sales, which would be mostly profit.

I told them that we could get it up and running within 90 days and that it would cost $150,000 to do so. They balked at the price, said they needed to spend time researching different options and alternatives and would decide within the next six months.

That was two years ago, and last time I reached out, they were still in research mode.

Here’s why that is absolutely bonkers.

They believed that in the worst case, a successful implementation would give them a 2% uptick in sales. That’s a $1.4M uptick, every year. They’re two years in and still haven’t made the changes they believed were required to get that gain. So they passed up on $2.8M dollars (of which ~$2.5M would have been profit) to avoid spending $150,000.

It’s the mirror image of the movie buying experiment. They were focused in so heavily on the upfront cost, that they neglected to factor in the improvement that they’d realize (even though just minutes before, they were telling me about what they would be doing with the extra dollars).

This is a general problem – I often describe it as the tyranny of input thinking which strangles productivity.

Here’s a thought experiment – Would you rather have an employee who worked 14 hours a day and got 60% of their work done, or one who worked five hours a day, and got 100% of their work done and then found ways to add even more value?

When you are thinking about upfront cost, it’s like being concerned with the facetime your employees are putting it in (their inputs), without thinking about the actual results they’re generating (the outputs).

In other words – it’s making the mistake of thinking that you pay them for their hours, rather than the value they provide.

Be wary of any attempt in your company to focus on inputs at the expense of outputs, especially when you notice yourself doing it!

Here’s your challenge for this week: Be vigilant about the encroachment of input thinking in your company.

Make a note of every time you hear somebody talking in terms of inputs (costs, hours, etc), and how often you hear them talking about outputs (results, hitting targets, ).

Be most vigilant with yourself. You’ll probably be surprised at the skew between the two.

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