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Decision Making

November 25, 2009

When you have a major decision to make, how do you go about making it? Suppose you are contemplating expanding your product lines, how can you be most certain that your increased investment and effort will earn an acceptable return? Or perhaps your lease is about to expire and you are considering moving to a larger space in a better location. How can you determine if the increased rent will be offset by higher sales?

An orderly decision making process will substantially increase your odds for avoiding an otherwise avoidable mistake. It will not make you clairvoyant. There is no way to be certain about the future. But that’s why our system provides rewards for those who are willing to make decisions and take risks.

Good decision making is a combination of subjective and quantitative assessment. Subjective assessment involves the use of expert judgment to arrive at a conclusion. Quantitative assessment involves the collection and manipulation of data on certain key factors for the purpose of projecting the impact of a particular course of action.

In the final analysis, subjective judgment should be applied to all quantitative data. However, the more relevant data that you can collect and the further you can advance your quantitative assessment, the better your decisions will be.

Inevitably there will be some decisions that will have to be based primarily on expert subjective assessment. Those instances will include situations where new influences have caused past behavior patterns to be irrelevant. Situations where there is insufficient data available to make a meaningful quantitative assessment. And finally, situations where new technology is expected to substantially alter the future environment. But these are the exceptions.

Let’s examine the decision making process for the store owner considering moving to a better location with a corresponding increase of $1200 a month in rent. How can you determine if the new location will justify the higher rent? Let’s see how much good data that we can gather for our quantitative assessment.

Begin by identifying those factors that will influence the decision. Obviously the most important factor will be the amount of store traffic. Start tracking the number of customers that come into your present store. If the store is to busy to easily accomplish this study, hire a temporary employee for a week to do nothing but count. This will be a small investment for a most valuable piece of information.

Now we need to know what the traffic will be at the proposed new location. Not so easy you say. Perhaps it is time for a subjective assessment. Not so fast I say! For such an important piece of data we need to make an extra effort.

Choose a comparable store in close proximity to your proposed location, take another temporary employee and station them across the street. Have them spend the week counting the number of people that enter the store. It may sound silly, but that’s the way the highway department studies road traffic. At the end of a week you will have good data on your single most important factor, the increased customer traffic at your new location.

We can go further yet. In order to justify the additional rent, we need more than just potential customers. We need sales. Let’s determine what percent of the door traffic actually makes a purchase. Analyze your cash register records for the period during which you studied your store’s traffic. Determine what percent of those that enter the store actually make a purchase and the average dollar value of each purchase.

Your inventive data collection and quantitative assessment have placed you in a position to make a good decision. If, for example, your traffic study indicated that you could reasonably expect an additional forty potential customers per day, and historically thirty percent of your potential customers make purchases and your average sale is twenty dollars, you could reasonably expect that the new location would yield an average increase of $240 (40 x 30% x $20) to your daily sales.

If your gross margin is 50% and your store is open thirty days a month, the new location should be contributing $3600 ($240 x 50% x 30) towards the increased rent of $1200. With the quantitative assessment complete, it is now appropriate to subjectively assess the data. Remember that the increased rent of $1200 is a fixed obligation. Since the increased revenues are only a projection, you will want to make sure that there is a comfortable margin of error.

In this case there appears to be an attractive margin between the fixed obligation ($1200) and the projected revenue increase ($3600). We have some good quantitative analysis to support our projections. Our subjective input have been minimal except for our final review. It appears that we are in position to make a good decision.

Because it’s your business, take an orderly course to making good decisions.

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