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The Great Ideas Letter Forum
How to choose between different business projects...
Posted By: Dien Rice
Date: Wednesday, 5 January 2005, at 2:45 p.m.
One thing about The Great Ideas Letter is that it gives you a LOT of different projects to choose from. Some people have trouble deciding which projects to do!
Of course, one of the first things to use to decide which project to do is your own situation and what it is you are looking for in a business...
How much time do you have? Can you spend full-time on the business, or is it a part-time sideline? Maybe you just want to work it on weekends? Some businesses can be run this way, others can't.
Also, what are your own likes and dislikes? If possible, I think it's better to start a business in an area that interests you. That's because if you actually like the business, you'll be more motivated to put the work in to make it succeed. And you may even enjoy it! :)
But really what I want to cover is the idea of "expectation values". Calculating the "expectation value" of a business project is also a useful tool in figuring out whether it's worth it to you to do it or not.
Now, a little warning. This will involve a little math. But not too much.
Okay, realistically, you never know with 100% certainty how much you could make from a business project. After a while, though, you get a "gut feel" and can make an estimate. But that "gut feel" usually goes something like the following...
Let's say (for example) that you want to start a stall at a flea market, putting on temporary tattoos. (An idea we've covered in the past.)
Usually, your estimates of your profit might go like this...
Let's say it will cost you $50 to rent the space. And let's say you're going to make $5 profit per tattoo.
You might think to yourself...
"I think there's a...
5% chance I'll lose $50 (if I pay to rent the space, and get zero customers)
5% chance I'll break even, that is, make $0 (10 customers)
30% chance I'll make $50 (20 customers)
40% chance I'll make $100 (30 customers)
10% chance I'll make $150 (40 customers)
10% chance I'll make $200" (50 customers)"First, this is just an estimate, based on your own experience and observations. Or, perhaps, a guess.
It takes into account that you could do well, or you could do poorly.
Also, notice that all the percentages add up to 100%. (5% + 5% + 30% + 40% + 10% + 10% = 100%). That's important.
Now, to figure out the expectation value, it's really just the "average" amount you would expect to make from this business, given your estimates.
You just take the percentages, and multiply it by the amount you think you would make, and add it all together.
Like this:
(.05 x (-$50)) + (.05 x $0) + (.30 x $50) + (.40 x $100) + (.10 x $150) + (.10 x $200) = $87.50.
Given your estimates, this is your "expectation value" of how much you think you will probably make, on average, at one day at the flea market. You "expect" to make $87.50.
Now that you have this number, it gives you a way of comparing one project with another. Because, you can estimate also what you might make with other projects. And use this as a tool to help you decide between projects.
I hope someone finds this useful. :)
- Dien
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