Why you should establish a culture of uncertainty when taking business decisions

Business woman who is not certain what to do.

Every company has to regularly take business decisions. It begins with hiring decisions, followed by budget allocation decisions over make-or-buy decisions and product-portfolio decisions.

As already discussed in an earlier post most of these decisions are taken by the HiPPO (Highest Paids Persons Opinion) principle. This blog post will introduce some decision which are taken under uncertainty. In the next week we will compare naive approaches for deciding and advanced strategies.

Examples

The given examples have all one thing in common they have the so called explore-exploit-dilemma. This means that all the time when you have to take them you have to decide if you use your current knowledge and go the best way currently available or you are taking some risk and take a new way. This new way might be better or worse than the way you already know. So you have to find the sweet spot between risk-taking and money-making.

Marketing Channel Budget Allocation

All web marketing actions are normally bounded by budget. You get a certain amount of money and then you spend them on different channels e.g. AdWords, Banner Advertisement, Affiliate Marketing or Email Marketing. You try to focus on the channel where you can buy the most leads and sales. After a certain time period you reevaluate your spendings and then reallocate your budgets.
Modern campaign management tools give you a real time view how your campaigns perform. Nevertheless it is still your decision how to allocate the next budget.

Offering of new products to customers

Lets assume your have ten new products in your portfolio and you want to sell as most as possible. The big question is which of these products to show on your front page. Let call these products p₁, p₂, p₃, … to p₁₀. You might know that showing p₁ on the front page has a conversion rate of 4%. For the other products you do not know yet how high the conversion rate is. The question is if you want to risk to show another product to gain the knowledge which of your ten products is the best selling product.

Best amount of free trial version length

Lets assume you are offering a service that is paid by a monthly subscription like Spotify or NetFlix. The question is how long should the free trial period be to have the highest conversion. Basically this is a balance of giving some away for free to get customer loyalty and getting paid for the service as fast as possible. On the internet there are all kinds of free trials periods beginning around 14 days up top half a year.
If you want to figure out which the optimal period is you have to use different trial periods for different customers.

Newsletter subject lines

This example was already mentioned earlier. So if you are sending a newsletter you do not know yet which subject line is the best one. So you have to try which one gives you the most opening rates. After figuring this out you will always use the subject line with the highest conversion rates.

Conclusion

If you want to gamble you should go to the casino

If your management team things that they know in advance the optimum for all these business problems then you shouldn’t call them management you should call them gamblers because this is basically what gamblers do. They thing that they know which number will pay the highest reward but as everybody knows if you are gambling you are going to loose a big portion of your money.