Think that Economics is just abstract theories that can’t be used to improve the business?  Think again!    At its core, Economics is all about the actions that must be done to get as much as possible from scarce resources.   That’s called being efficient and effective – concepts that managers focus on every day.   In other words, Economics is at the heart of management decisions and all managers need to have an understanding of its core principles.

Here’s three of those economic principles that you must always consider:

Principle 1: Your customers face trade-offs, so you should always minimise their opportunity cost of buying from you

Have you heard of the term “opportunity cost.”?   Basically, it means that in order to acquire something we want, we usually have to give up something else to get it.   For example, if someone wants to buy your product for $25,000, they have an explicit opportunity cost of being unable to purchase other goods or services worth $25,000.00

Since the explicit opportunity cost of purchasing is something that all consumers are aware of, you need to ensure that they feel as though they’re getting the better deal buying from you. Your marketing message should then position your product or service in such a way that the benefits of purchasing vastly outweigh the explicit opportunity cost.

Remember, your customers don’t want to buy things – they want to solve their problems.  With this in mind, you need to make the benefits of purchasing your product or service so appealing that the prospect doesn’t even consider the opportunity costs inherent to their decision.

Principle 2: When making cost decisions, always conduct a marginal analysis and think of the cost:benefit of the last extra unit

You should always choose the product or service that meets your needs in the most optimal way possible, balancing price, opportunity cost, and perceived benefits in each and every transaction. To do this, you should analyse issues and make operating decisions at the margin (ie: based on the cost vs. benefit related to one extra unit of the issue being considered, not the accumulated total) and ensure the marginal benefit exceeds the marginal cost.

For example, we should decide to buy another machine based on the cost of the extra item, not on the total amount spent over time (ie: consider marginal cost not total cost when making a decision).

Basing decisions as to what happens at the margin allows us to assess the additional value gained from a particular decision, and then see if it is worthwhile to change actions.    We should always ask ourselves if we are benefitting from each additional dollar spent in an area

Principle 3: People respond to incentives, so compete on enhancements to your product/service, not on price.

To “behavioural economists”, demand is driven by incentives – the value consumers feel they receive from a good or service – not merely price stickers.   To increase sales you should then focus on overcoming their perception that your competitor provides better value.  That means upping the value-enhancements such as after-sales service.   Don’t compete on price, you’ll just end up in a disastrous price-war that eats away your revenue.   Simply offering your product at a reduced price may not be as compelling as you might hope.   Sometimes, people want other things.

If you want to leverage the principle that people respond to incentives, you need to understand what your prospects consider valuable.   So what can you do? First, understand what motivates your ideal customer and discover what drives them.   Use demographic data to research your custiomers.

Identifying your ideal customers’ age, marital status, level of education, and estimated annual income can yield tremendous insight into what incentives your prospects will find appealing.

Want to know more about Economics and how it can be used to improve your business decisions?  Want to do the highest-ranked MBA in Jamaica?  Call Sean or Phoebe NOW at 908-4810 and register for the Edinburgh Business School MBA Programme.  Space is limited for the next semester starting in January, so send in your application NOW!