Risk and cost

[Rabby]

This is conceptual, but I think it holds true in a lot of ways. Risk vs reward gets talked about, but I think risk vs cost is interesting too.

Risk and cost are pinned to each other in the middle like a see-saw. If the risk goes up, the cost goes down. If the cost goes up, the risk goes down. It's not a perfect see-saw... the line in the middle is floppy. But it's a pretty consistent relationship.

Nobody really knows what "the reward" will be. The reward is in the future, a mere implication. Risk and cost are both in the present. They compare well. (Ok, risk has some future states built in, but it's a present-time estimation of possible future costs).

If you offer someone a guaranteed salary, there is little risk for them in working for that salary. Therefore your cost can be "less" because part of their pay is the assurance of pay.

On the other hand, if you assure nothing, only paying based on how many sales they make for example, the cost to you is ultimately higher. At least, the cost as offered. Cost per acquisition, cost per sale, cost per lead, cost per customer served, cost per laptop repaired, or whatever the deal is. If they don't know what they'll get paid, you'll have to build in some padding to account for that. It's why commissioned sales people can make a lot of money. Can, as long as they actually perform. They're accepting some of the risk, and you're accepting an increase in cost per work item.

People estimate this naturally, unconsciously, but it comes out pretty fair, I think. And there's an interesting sorting mechanism that comes into play. People who can perform like gangbusters like to take risk, because they know they can get more using their magic risk-overcoming skills. People who aren't so sure, or who don't have the stomach for risk, will never put themselves in a situation where pay is based on variable factors. Both are Ok for employees depending on their goals, but as an entrepreneur you can use this manipulate risk and costs for your enterprise.

This may or may not sound obvious, or obtuse, I don't know. But it's worth thinking about. This concept factors into pricing, negotiation, employment, and all sorts of things. Keep it in mind especially if you're negotiating, and you sense someone trying to shift risk over to your side, or costs. You can use risk and cost to offset each other cleanly.

 

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