Connect with us

Entrepreneurs

How Not to Make the Wrong Assumptions and Hurt Your Business And remember, Ceteris Paribus

Published

VH_iStock_700x330px_0000117.jpg

Every economics course – at least the good ones – will cover the idea of “ceteris paribus,” and its meaning: “all things being equal.” While it’s central to every economics program, the term is taught early in the class, and then forgotten as the semester goes on, and unfortunately when the student becomes a business owner.

But it is essential that is remembered in business, and especially in decision-making. In everyday language, ceteris paribus translates into “every business plan or analysis assumes certain assumptions that must be valid for the analysis to be useful.”

Here are a few examples:

  • Weather, war, inflation, the economy and politics can all affect business decisions but for some reason, they are ignored.
  • Markets can change dramatically and we ignore the consequences, i.e., iPhones, gay marriage, healthcare, the baby boomer generation, population diversity, are all factors that impact business in one form or another.
  • Social media continues to grow in its usage and impact on national and global events, drowning out other forms of media.
  • Internet shopping is growing in leaps and bounds, 20% per year; brick and mortar’s growth? 2 % or less per year.
     

The most important issue is bias, prejudice, and yes, even ignorance. I read numerous plans which start with glowing descriptions of the potential of businesses in the fields of climate control, or site sharing, or with amazing apps, however, most of these simply failed to recognize competition, expertise, financial requirements, marketing needs, start-up costs and timing. For example:

  • We frequently believe our idea or service is so great there is unlimited and exponential demand.
  • We believe our idea is so great that our marketing will go viral and not require significant investment to build the projected forecast.
  • We believe our idea is so great that we can price wherever we want without worrying about competition.
     

There are numerous ways to evaluate your assumptions above and beyond your basic planning processes:

  • Simply research, state and understand your assumptions and parameters.
  • Never say this: “we have no competition.” Do an objective competitive analysis often, and ask these three key questions regularly:How is your business/service different? How can you communicate that difference? Do enough people care about that difference?
  • Develop a simple pro-forma chart, detailing sales goals, costs and marketing requirements. I cannot tell you the number of plans I’ve read that market services for other suppliers and receive a commission of generally 5-10 %. The business plan counts the total transaction as income, not realizing that the only profit is the commission.
  • Ensure you have adequate expertise and staff in your business, and consider outsourcing certain functions so you get the best people to do it, as well as their objectivity.
     

In summary, we simply need to take our blinders off and consider our challenges as well as our strengths. It involves extensive research, analytical work, planning and expertise. But, you’ll never see the full picture of your business if you’re only looking through window that has the shades halfway down.

Continue Reading

Trending