If your business goal is Business Growth, you want your business to gain market share over
your competitors.
and increase income directly to the last line of the financial statement after deducting expenses in the business is the ability to make a profit.
But don't forget that every time you invest more in expanding your business, such as spending more on marketing, your business will incur more expenses.
According to the equation, profit = income - expenses.
But that's it; how will your business grow if you don't spend money on business development and marketing ?
There are still some methods. Just observe the customers' Willingness to Pay (WTP).
WTP is the maximum amount of money a customer is willing to pay for a product or service.
To avoid getting confused by jargon, I'll compare these things to the Magical Creatures you can see in zoos, like camels, and imaginary animals like unicorns.
For example, my real business is a hotel in Thailand that wants to invest in more facilities to
attract more guests.
The Gauge chart shows a limit, which shows the maximum price you can sell this product or
service to customers.
My hotel business has long-term investment expenses such as land and buildings. Suppose we calculate without calculating depreciation or value added from land per night. In that case, I calculate long-term expenses or fixed assets only for 1 room per night + short-term investments such as utilities, breakfast, and cleaning expenses, which are computed for only 1 room per night. I will get the approximate total cost of 1 room. After that, I add the profit before setting the selling price.
The question is, what is the maximum price I can set for selling my accommodation per night ? Let's say my hotel has a total cost of 1 room per night, which is $15. Should I set the price per guest per night to $17, $19, or $29 ?
The answer is Willingness to Pay (WTP), the maximum price I can set for selling my
accommodation. If I accidentally set the price higher than WTP, no guests will definitely come to stay. But if I set the price too low, such as $17 per night, my accommodation will definitely have guests. But when I take the selling price of $17 and subtract my total cost of $15, that's only a profit of $2.
So, how can I set prices that will maximize my profits ?
The answer is to find the best point in setting the selling price (The selling price), which is to set the price as high as possible but not exceeding WTP so that my guests are willing to pay to stay, but I still make the most profit potential.
But that's it. Finding the right selling price sounds easy, but it's hard. In the past, I had to use trial and error, continuously setting the selling price of the accommodation until I found the right price. But the right price can't last forever because other external factors affect the price of my accommodation, such as competitors or changing popularity, etc.
If I continue to use the Level 1 decision-making method, which involves making decisions in the Old School Business way, not relying on any data, and making decisions based on personal experience, I will be more likely to be wrong than right because I may invest more than what the guest needs. When the capital I invest in results in a higher nightly rate than the guest's Willingness to Pay (WTP), it may cause my hotel to go bankrupt.
Let's compare investing in a business to running a race. Suppose the business owner chooses to invest and sets the selling price based on feelings without using data and AI technology. In that case, the price set will be a bad selling price that is not in line with the investment budget.
It is like a business owner choosing to ride an outdated creature, Old School Business, such as a dinosaur to run the business. Therefore, the investment simulation result of a businessman who still chooses to ride a dinosaur will look like this.
Due to the neglect of using data, business owners are uncertain about how much to set the
price of their products or services. Therefore, business owners often set the price lower than the market or competitors to ensure that their products or services will sell. The result is that setting the price too low, which deviates significantly from WTP, will result in a missed opportunity for profit.
But suppose business owners choose to switch to riding on magical creatures like unicorns. In that case, their business can go further because using data and AI technology will help them make accurate pricing decisions and get closer to the WTP that customers are willing to pay, which positively affects business profits.
But at the same time, when business owners decide to ride a unicorn, they should be careful to invest in it, such as conducting market research to find more than 95% accurate data to make the right decision.
It may not be a good idea (if your business is not directly related to health or things related to people's lives). Every time you conduct market research, you will need a budget, such as
surveys and focus groups.
Also, my hotel business wants to expand its accommodation market share by investing heavily but selling the room rate cheaply per night to attract more guests. In that case, it is a decision to increase demand to win market share over competitors. These methods are similar to the disadvantages of magical creatures like unicorns.
Unicorns live in an abundance of unlimited resources. That means if I decide to ride a unicorn, my business will have to spend a lot of money to win the market but will make little profit or lose a lot.
Another wonderful creature, such as camels, can live even in remote areas like the desert. They can adapt to survive, generate good profits, and grow to have a market share proportional to the business.
If I choose to ride a camel, I may use Level 2 decision-making using data to create a predictive business that can predict future events no different from a unicorn by investing only as much as necessary to make more than 68% accurate decisions. It is good enough to decide to invest in new facilities in my hotel. I may collect data from Focus Groups of more than 30 people; then, I can decide whether to invest. In addition, every investment I make must predict profit, not just income. It is not necessary to beat competitors thoroughly. My hotel can find a group of guests who want to stay with high WTP and like my hotel. Grow your own ecosystem [1]. I will be able to set high accommodation rate prices and reduce unnecessary costs, resulting in more profit for business owners who ride a camel [2].
Conclusion
The importance of investment decisions in business, if not taking advantage of data and AI
technology, is no different from driving with your eyes closed, not paying attention to the car's speed gauge to see how fast you can step on the accelerator and take the car. And when you are unsure of your decision, your business moves forward slower than it should be.
At the same time, investing in data and AI technology more than you should will affect your
investment budget and profits. Therefore, the Gauge is a reminder that we should take
everything necessary to affect business decisions, not just willingness to pay (WTP).
Let's create data visualizations to facilitate accurate decision-making, mitigate risk, and create continuous profit for business owners who ride the right Magical Creature.
If you have any questions or are interested in taking the quiz to find out what kind of Magical Creature you are riding, click the button below
References :
[1] Feng Zhu and Bonnie Yining Cao. Smart Rivals. Harvard Business Review Press;2024.
[2] Alex Lazarow.harvard business review. https://hbr.org/2020/10/startups-its-time-to-think-like-camels-not-unicorns "
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