Turning Risk-Taking into a Numbers Game
The Smart Risk Equation
"But risks must be taken because
the greatest hazard in life is to risk nothing.
The person who risks nothing, does nothing,
has nothing is nothing."
from To Risk by William Arthur Ward
Not all risks are created equal. Actually, the ones we take every day can be easily categorized as either "smart" or "dumb."
Running a red light is dumb. Designing 5,128 prototypes was smart for James Dyson, the inventor of the dual cyclone bagless vacuum cleaner.
Taking risks is neither all negative nor positive; we should view it as a balanced focus on both the downside of taking risks and not taking risks.
The Sales Academy shares examples of risk-taking in sales: "You take risks in a lot of ways. As a salesperson, when you call on a different type of customer than that with which you have become comfortable, you take a risk. For example, when you call on the Chief Financial Officer of a business instead of just the production supervisor, you've stepped out of your comfort zone and taken a risk."
The key is to take smart risks that improve our lives and help us be successful and not end up dead, homeless, or in any other unappealing situation.
Tyler Tervooren created a simple equation, The Smart Risk Equation, to guide us toward smart risks that improve our lives and away from dumb ones that subject us to unnecessary loss:
The two important variables in the equation are Potential Loss and Potential Reward.
Potential Loss means, "How bad will it be if there is a complete failure?" You might rate it on a scale from 0 to 9, with 0 being no loss at all and 9 being some sort of horrible, unacceptable loss.
Potential Reward means, "What's the outcome if there's success?" You can rate it on the same 10-point scale, with 0 being no reward and 9 being a life-changing, nearly unfathomable reward.
The approach is just to assess how bad or good things could be if you take any given risk. The simple equation is: RQ (Risk Quotient) = PR (Potential Reward) ÷ PL (Potential Loss)
A smart risk is defined as one where RQ ≥ 3.
Now, it looks like a mathematical formula, but it really is not one. The two variables you assign values to will differ depending on the person doing the equation. We all have the ability to interpret the same situation differently. What looks like a smart risk to one person may be a dumb one to another.
The Smart Risk Equation is simply a framework you can plug your own variables into that will help you draw a picture of the risks you want to take in your life.
Now, let me apply Tervooren's formula to a couple of sales scenarios:
Calling on the CFO instead of the production supervisor:
RQ (3.5) = PR (7) ÷ PL (2) = SMART
Calling on an account that is a long shot:
RQ (3.5) = PR (7) ÷ PL (1) = SMART
Discounting that does not align with your company's ethics:
RQ (0.8) = PR (7) ÷ PL (9) = DUMB
Standing your ground when asked for a discount:
RQ (3.5) = PR (7) ÷ PL (2) = SMART
Calling on a new client without preparation:
RQ (1) = PR (7) ÷ PL (7) = DUMB
Burn the bridge when a client does not renew:
RQ (0) = PR (0) ÷ PL (7) = DUMB
Would you interpret the scenarios the same way?
The Sales Academy again: "Basically, motivation is an important factor that contributes to taking more risks. However, with daily or monthly quotas bearing down, it can be difficult for managers to think differently and encourage their sales staff to take an innovative approach with customers. Hence, they fail to develop the qualities needed to take intelligent risks."
Find out how interim or fractional sales leaders can help to develop those qualities in your sales team.
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Sales Academy – How to take calculated risks in sales and achieve success
Tyler Tervooren – Finally, A Simple Way to Tell Smart Risks From Dumb Ones
LeadershipNow – 5 Things Smart Risk Takers Do Well
Photo by Anne Gosewehr