Role of Probability Concepts in Business Decision Making

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Instinct may often tell you that a business decision will be the right one, but relying on instinct alone is seldom going to lead to success. Any series of actions will generate different results depending on a variety of circumstances, many of which won't be under your control. The importance of probability can't be overstated. Understanding the odds of getting the results you want will not only help you to reduce unnecessary risk but will also help you to achieve success.

TL;DR (Too Long; Didn't Read)

Market research is a tremendous way to understand the probability of success when making a business decision.

Probability in Decision Making

Any series of events can result in multiple outcomes, and the more variables you have surrounding those events, the less certain you can be about any one outcome. Flip a coin and there is a 50% chance that your guess will be correct. Flip three coins and your odds of guessing the outcome for all three coins is only one in eight, or 12.5%.

There is little opportunity in trying to predict a single outcome from a series of events, but there can be lots of opportunity in predicting a range of outcomes. Getting a head in one coin flip is only 50%, but if you flip three coins, the odds of one head coming up is 75%, while with three coins the odds of one head rises to 87%.

This same principle applies to sales reps who know their closing ratios. If you know that you close one sale for every three appointments you have, then you know on average you will make a sale every day if you book three appointments. If you didn't know your closing ratio, you could only guess at how many appointments you need, and you would be unable to generate a reliable sales forecast.

Using Probability to Increase the Odds of Success

There are four strategies you can use to increase the probability of success in business.

  1. Identify unknown variables. 
  2. Don't rely solely on single outcomes.
  3. Target a range of outcomes centered around what is most likely. 
  4. Identify trends or patterns in outcomes.

Market research is an invaluable way to leverage each of these strategies. Suppose, for example, you are launching a new product and are trying to determine the best sales channels to use and what price to charge. A single person's response won't give you much data with which to work. Just because one person may be willing to pay $10 for a loaf of bread because she's in a hurry doesn't mean that many others will.

With market research, you can identify unknown variables that may affect purchases, like the color of the packaging. If half of the respondents say they would be more likely to buy the product online and the other half are more likely to buy it in a retail store, then offering both options should increase sales. If 20 percent of respondents are willing to pay double the price at product launch, then that may be a good option for the first several weeks. You could reduce the price or offer discount codes to those who didn't complete the initial purchase.

Examples of Modern Applications of Probability in Business

Market research, including surveys, is just one way companies can identify probabilities and make decisions on solid data. Simply asking customers or prospects for their opinions before making your decision will reduce your risk of making the wrong move. For example, if you have the opportunity to buy a product in bulk for resale, a survey of your customers will give you some indication of how many units you can turn over, thus helping you to determine how many you should buy without worrying about overstocking the item.

Another example of leveraging probability is the use of split tests in marketing. Before investing thousands of dollars in online ads, smart marketers will run a few tests first. By running two different ads at the same time, you can compare their click-through rates and then delete the one that is the least effective. Next, you can tweak that ad and run additional split tests with a single modification each time, such as changing the font, wording, image or colors. At the end of the tests, you can then run the ad that has the greatest probability for success.