Asymmetrical Risk

Fear of failure runs deep in the British psyche, it prevents most people from even contemplating starting their own business and restricts the growth of many enterprises. Advice from organisations helping start ups or analysts that you employ later in a company’s growth cycle will often focus on breaking things down and cutting cost out of each process. This will squeeze more profit out of an operation but it’s not going to get you on the rocket ship of expansion if that’s your ambition.

I have a rule that really upsets my mother – look after the tens of thousands and you won’t have to care about the pounds and pennies. This may seem wreckless or even a bit arrogant but please don’t think of it that way, it’s genuinely based on solid business principles and my devotion to logic and mathematics.

Consider the roulette wheel in a casino.  In the UK with only one zero slot and 36 numbers the house edge is 2.7% or to put that into perspective on average for every £100 wagered the players will win £97.30 and the house will win £2.70.  Doesn’t sound like much of a business yet all those premises, rates, staff, complimentary sandwiches and drinks are paid for and the only way a casino can lose is if not enough bets are placed.

The secret here is that it’s lots of little bets so logic and mathematics dictate the result is inevitable.  Try going to a casino and placing £100k or even £10k on black and they won’t take your bet – the risk to the house on a one off bet is too great.

To adjust your mind, consider someone offers you 10:1 odds on throwing a six with a dice but you have to bet your £600k house on it.  Logically this is an excellent opportunity but you shouldn’t take it because the chance of you losing is 5 out of 6 or 83.33%, so definitely don’t do it.  However if you are allowed to place £100 on 6,000 rolls of the dice then it is certain that you will win close to 1,000 times and bank £1m. Bet your house on it!

The way to apply this to a business is to take lots and lots of small bets then when you find something that works, throw as much as you can behind the opportunity.  What you have to do is come up with a constant stream of ideas that fit two critical criteria- can the result be measured and can it be tested cheaply?  What is cheap depends on the size of the organisation – In our case cheap testing means under £500, for a global hotel chain it might mean only spending £1m opening a test site in Mongolia.

Entrepreneurs suffer from an affliction of having lots of great ideas every day so the problem is not finding them but filtering them down to those worth trying.  My long suffering managing director has a phrase for this- we call them running ideas.  I come into the office with a fantastic and innovative suggestion such as ‘We should run a ballot like Wimbledon for August beachfront properties’ or ‘Guests might like a hypnotherapist during their stay’ and she will look at me with a special face and say ‘You had this idea when you were running didn’t you?’  It’s true that most of these innovations will turn out to be worthless failures but that is the whole point, every now and then someone will come up with a gem and without trying and failing lots of times you won’t find the one that works and generates a fantastic return.  Test, measure, fail is a mantra that should be instilled in every member of staff from chairman to apprentice.

The final key to success is that when you find something that works double down on it, measure and if it still works double down again. Repeat this process until the return starts to flatten out.  What has changed in the last decade or two is that Google paid advertising provides the ultimate vehicle to test any idea and then a channel to double down.  It’s why Google is a money printing machine but also why it helps online businesses to print money. I’ll be following up with a whole article on this next time.

Simon Tolson owns Rumsey of Sandbanks, a holiday letting agency. Contact Simon on 01202 707357.

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