What one decision actually costs you
One decision. Five consequences. Most businesses measure only the first.
Picture a board paper recommending a 6% price increase. It will be a good paper. It will model the margin improvement carefully, allow for some volume loss, and show that the business comes out ahead. The board will approve it, and in most cases the board will be right to.
But look at what the paper measured. It measured one consequence of the decision, the one that will appear in the accounts within the reporting period. A price rise does at least four other things, and in most businesses, nobody writes them down.
Following one decision through
Start with value. A higher price changes the judgement customers make about whether choosing you is worth what they have to give up. For some it will still be comfortably worth it. For others it moves from an easy decision to one they must think about, and a customer who has started to think about it is a customer who has started to look around.
Then preference. Your competitors didn’t raise their prices, so relative to you, they have just become cheaper without doing anything. For the customers who were only slightly tilted your way, that may be enough to tip the balance.
After this comes access and how easy you are to be found and bought. We all know that price affects whether people can buy what you are selling. In many categories, it moves the product or service out of reach of many households. In business markets, it can do something less obvious, like pushing a purchase over the sign-off limit of the person who used to approve it, without requiring a meeting with someone with greater buying clout. The product did not change. The buying process just got a whole lot harder.
From there, experience follows, and it’s safe to say a higher price point raises the bar the experience that you offer must now clear. The same service at a higher price feels worse, because people judge what they got against what they paid. A business that raises prices without improving anything has quietly made its experience less satisfying, opening the door for a competitor’s offer.
Memory is usually the least affected, and it is worth saying so, because the point of the exercise is not to find damage everywhere. A well-handled price rise may do nothing to whether people think of you at all.
None of this means the price rise is wrong. Many businesses are underpriced, and raising prices is one of the most valuable things they can do. The point is that the decision has five consequences, and making it knowing about all five is a different decision from making it knowing about one.
The Asset Impact Test
This is the discipline I use that I’ve called the Asset Impact Test, and it is deliberately simple. For any significant decision, you ask what it will do to each of the five assets, in which direction, how quickly, and how easily it could be reversed if it turns out to be wrong.
That is the whole test. It fits on one page. It takes a leadership team about twenty to thirty minutes, and most of the value is in the arguments it starts rather than the answers it produces.
Try it on a decision that looks purely operational. A business replaces part of its customer service team with an automated system. The cost saving is real and measurable. Access may improve for simple questions, which can now be answered at midnight, and get worse for complicated ones, which now take longer to reach a person. As a result, the experience changes depending on the kind of question a customer has. Preference is affected at the margin, because customers compare. And memory changes too, because the story people tell about a business is often a story about the time they needed help, and it proved to be a real pain in the rear.
Let’s look at another example, this time on a budget shift. This one happens quite a lot in my experience. A business moves money out of brand advertising and into performance channels because the performance channels report better numbers, particularly in the short term. Leads rise this quarter, many people are happy, and that is the only consequence the dashboard shows; everything is green. Memory begins to decline slowly among the people who are not yet in the market, which is most people in most categories most of the time. Within a couple of years, performance channels work harder for the same or often a worse result because fewer people arrive already thinking of you. The decision looked like efficiency. It was a transfer from next year to this one, and the result can often be that businesses spend significantly more to get back to where they were, and in some unfortunate cases they can’t.
Why very few do this
Let me first say it's rarely because people are careless. But because the first consequence of any decision arrives inside the reporting period, and the other four arrive later, spread out, and attributed to something else.
When the price rise costs you a few customers eighteen months later, the loss will show up as a competitor having a good year. Or when those changes you made to your service make the business a little less recommended, it will show up as a slightly slower pipeline. The cause and the effect are too far apart for the normal reporting cycle to connect them. So, nobody does, and the next decision is made with the same blind spot. Without raising our gaze to a longer horizon, clearer on what potential changes now could do to that longer-term view, many decisions today can have terrible longer-term consequences.
The Asset Impact Test helps to connect them in advance. It will not tell you whether to make the decision. It’s not a Magic 8 Ball after all. It does, though, tell you what you are trading, which is what the board paper leaves out.
Earning its keep
I fully appreciate the Stronger Business Operating Model is new, but it’s built on years of experience, and having run it with a few clients now, I've found the test most useful in three places. Pricing, for the reasons above. Cost programmes, because they are designed to find savings and are very good at finding them in things nobody measured. And anything that changes what a customer sees or touches, from packaging to the buying process to the tone of an email, because those changes act directly on memory and experience and are almost always approved on other grounds.
I would also say it is least useful for small decisions, and I wouldn’t recommend running it on everything. The aim is not a new layer of process. It is to make sure the few decisions that really change the shape of a business are made with the whole picture in front of the people making them. We all know nothing in business, or life for that matter, is guaranteed, but this is about discussing and finding the things that will make the biggest positive impacts today and build a stronger business in the long term.
The Asset Impact Test is one of the tools in the Stronger Business Operating Model, which is written up here: https://somethingdifferent.co.nz/musings/the-stronger-business-operating-model.html.
The takeaway question for this instalment is backwards-looking. What was the last significant decision your business made, and which of its five consequences did anyone write down?
