What’s a False Economy?

When you’re running a business you need to make lots of decisions, and all of them essentially come down to how you spend your resources. Whether the resource in question is money, the time and effort of your team or the value of your products and services, you decide where to spend it to achieve what you want at the least possible cost.

The pressure of this decision-making, and the need for results makes you prey to a particular kind of cognitive bias that could cause you some real difficulties in the long term. It’s long term success you have to lay plans for, even as you fight the day to day fires that break out simply as a matter of running a business. Unfortunately the human brain is tuned to overvalue short term gains and downplay longer term results, which can lead to you falling into the trap of making False Economies.

It’s important to understand what these are so you can identify them and avoid them, and proof your business planning against the short-termism that can prove fatal to a business, whether you’re a multinational company or a tiny start up.

A false economy is taking action to save money in the short term that harms your ability to make it in the long term – it could set you up for a big ongoing cost in return for avoiding a small immediate outlay. False Economies lead you to skimping on areas like customer service, risk avoidance, and research. In the early days these are significant costs, but laying the foundations for good policies here will pay you dividends in the months and years that follow.

If you don’t make the investment in processes to protect you from loss from day one, for example, when your purchasing budgets and revenue stream both scale up you‘ll find yourself bleeding money on both sides of the equation.

So how can you avoid this trap for your business? Most importantly, you can make sure that your decisions are backed by data: data, research and hard facts help to proof your decision-making against cognitive bias.

Some of the most vital data you can gather is through market research: this allows you to discover what your customers want, what they value and how much money they have to spend. Shoring up your decision making with hard data about what will succeed and what will fail will helps you to avoid cognitive traps. Click here to find out more about working with market research companies.

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