making better decisions - 9. Cost-benefit analysis of each option
Dealing with Difficult People
This email is one in a series on decision-making. The first one is an introduction to the series.
9. Cost-benefit analysis of each option
What does it mean to perform a cost-benefit analysis on a decision?
For this particular decision, identify the timeframe that you want to consider - the longer the timeframe, the less accurate your prediction is likely to be as more of your assumptions will change over time. Perhaps you might start out thinking about a one-year timeframe, though this will depend on the nature of the decision.
Work through each option and consider:
In that timeframe, think about all the expenses that are likely to be associated with that option (the costs - some of these will be directly related to what you're doing, some may just be basic overhead that come with choosing the option, some may be intangible, where there's a reputation impact for making a particular choice), and all the benefits (monetary, but perhaps an improved reputation that would have a particular marketing value) that will go with that option.
If the option you are considering has particular risks associated with it, you may need to think about the likelihood of each of those risks, and factor in the cost of the risks as well.
The different options will have different cost-benefit results: some may be negative, where the costs are greater than the benefits (this is likely a red-light for the decision), but others may be positive (and so this will be a green-light for the decision).
If you're looking at a particularly complex decision, you might have multiple criteria for success, and different options might have different results across each criteria.
To try and make this a bit more tangible, you might have three boxes of 10 t-shirts, red, blue and green. When you promote your t-shirts, you need to pick a promo photo.
a) a photo with three people, each wearing one colour. b) a photo with one person, wearing a red shirt
If you choose photo (a), you might sell the different shirts, but if you choose photo (b), you'll sell more red shirts, but you may be stuck with more of the blue and green shirts.
If we said that the red shirts were selling for $50 each, and the blue and green shirts for $10 each, where the cost of supply for the shirts was $5 each? This might help us choose to move more of the red shirts, and seek to make more money overall.
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Have you ever had to use cost-benefit analysis? Hit reply and let me know.