It is a proven fact that most people feel much stronger about losing something than gaining something. Unfortunately, this often leads to mistakes in business, primarily because of the perception of what might be lost.
Over the years, predominately by watching great CEOs in action, I have a better handle on understanding real risks vs. perceived risks. Here are three perceived risks that I often see cause CEOs to make bad decisions:
- Hiring “expensive” people
Let’s say that the most expensive person on your payroll (other than you) makes $110,000. Your company is growing and clearly needs more experienced talent to get on the bus. So you meet the “perfect” candidate, but their salary requirement is $160,000 a year. Whoa, that’s a lot. The next best candidate is only $120,000 a year, but clearly does not have the same potential as the more expensive candidate. So you, still running a “small” business, worry about the risk of hiring someone with a $160,000 salary. Here is how I would size up the real risk: the difference between the two candidates is $40,000. Plus, worst case, I will know within 6 months, if not sooner, if the candidate is not the right fit and can cut my losses then. So we are looking at a $20,000 risk (all other things being equal like opportunity cost and so on). So just looking at the money side, this is a $20,000 risk, not a $160,000 risk. Personally, I would be more concerned about the risk of hiring the second best candidate and not growing as fast as I would like.
- Raising prices
For some CEOs, raising prices strikes the same fear as asking a girl to dance for the first time. The perceived risk is that customers will leave. (Actually, I think many CEOs fear just having the conversation with a customer). The real risk is not that great. If you are delivering value and you communicate the price increase properly, few customers will complain and fewer will leave. In my experience, those who leave were ones that never believed in your value proposition to begin with and were often problem clients that sucked up resources anyway. If you don’t raise prices, you now have to deal with shrinking margins (your employees are raising their prices, right?) and maybe can’t pay yourself enough.
- Trying something new
The pace of change in business is increasing at an ever-faster rate. Your industry is likely evolving because of technology, globalization, the change in how people buy, or all of the above. So your business needs to evolve, as well. Maybe it’s a new product line or perhaps a new website (if your site isn’t responsive, you need to change it ASAP). Unfortunately, many CEOs who have been at it for awhile get stuck in a rut and fear change. The truth is, the real risk of trying something new may be much lower than the status quo. Sometimes, the CEO is waiting for “more information.” In reality, once you have about 70 percent of the information you need, you have enough to go ahead and make that decision.
P.S.: Worried about Ebola? It is certainly a huge crisis. As of the time of writing this post, 1 person has died from Ebola in the U.S. Over the past few years it is estimated that 20,000-40,000 people have died from the flu each year. The media is driving the perceived risk. And now some members of Congress, armed with this perceived risk, are calling from a travel ban, which according to this article in Business Week, is the last thing we should do.