Find the constraint and choose the next move 6 of 17 in this group
SOP 188
Apply the cost-of-change rule
What this page is for. Use it before you change how any part of the business runs: a new process, a new sales motion, new pricing. It carries one owner's observation that a change costs performance up front, whatever it might return later, and the minimum gain that owner asks of a change before making it. It also carries why one change after another keeps a business under what it could do, and what tends to happen when a business is left alone. The order of questions it sits behind is SOP 184.
SOP-188-Apply-the-cost-of-change-rule.md
1. What a change costs
The idea reportedly took a long time to figure out. Picture a line for the revenue of the business under its normal activity.
What one owner has observed. In that owner's businesses, a change drops performance by about 20 percent. Whatever the business was doing, say a new customer success process, a new sales motion or new pricing, the expectation there is typically a 20 percent decrease, especially if there are people involved.
How firmly it is held. It is believed, in general. It is not a rule of law; it is just a rule of thumb.
2. Weigh a sure cost against a possible lift
Treat that 20 percent drop as fixed and certain: you know it will happen. The question then is which bets are worth taking.
Say you have an idea that you think could give a 5 percent lift. Are you willing to take a sure 20 percent cost for the chance of 5 percent? A guaranteed minus 20 against a possible plus 5: that owner's answer is no, and the business carries on as it was.
3. The twenty percent minimum
So what that owner has is, kind of, a rule of twenty percent as a minimum. If a change is certain to cost 20 percent, it has to offer at least a 20 percent increase, for whatever is being put into the business, before it is worth the risk and the work.
The objection. Some of you might say: fine, if I take the 20 percent drop and get the 5 percent lift anyway, it would take me four or five months, and then I would be 5 percent above where I started.
What happens in practice. The lift starts to come through over time. But then you get another great idea, and you change something else about the business, and you take another 20 percent drop. So the business is almost always running below what it could do in theory, because you keep changing things.
4. One practice: change fewer things
One of the biggest changes that owner would say they have made as an entrepreneur is changing fewer things. If something is going to change, it had better be worth it, because a change disrupts a great many process flows and a great many teammates.
A habit still fought. That owner thinks many of you may be guilty of this, and was too; it is called like an addiction, fought every day. What has dramatically cut the number of bets that owner will take is seeing that a change has a fixed cost and a variable upside. That is that owner's twenty percent minimum gain rule.
5. What a business left alone does
Something you will find in general, and kind of a fun one that you can extend further: if you change nothing about a business, it will usually improve by like 3 percent a year.
The statements here pull against each other. One: that is why GDP in general grows by that amount, and it is not because of population growth. The other: there is some degree of population growth.
The point made either way: people who are simply left alone tend to improve at their work. They tend to grow more efficient, build the skills, put in more repetitions and get good, and as that happens the business improves.
Leaving it alone. Experience here suggests some of the biggest gains in businesses come, sometimes, from making the change and then just leaving it alone. That is why, in one example, an owner's business partner will sometimes say to go away and find a project.
6. What this page does not decide for you
- How the four or five months are reached. The objection gives the period without the arithmetic behind it. Not established on this page.
- Whether GDP growth comes from population growth. It is first said not to, then that there is some degree of it. This page does not settle which reading is right.
- What counts as a change. The examples given are a customer success process, a sales motion and pricing, with the drop expected especially where people are involved. Not established on this page.
| Flag | SOP 41, section 4 | This page |
|---|---|---|
| A small expected lift | One test a week on a platform; a year of weekly improvements improves a business a lot, and one business grew through small quarterly moves in its rates | A change typically costs about 20 percent; a possible 5 percent lift is not worth it; one owner's minimum is at least 20 percent |
| The scope stated | Tests on advertising and on the steps of a funnel, with show rates and outbound pickup rates among one business's goals | One owner's businesses' changes, especially where people are involved |
Following SOP 41, you keep taking small gains and take on whatever drop each change brings. Following this page, you pass up gains under 20 percent and change far less often. This page does not settle which reading is right.
7. The checklist
| Step | What to do |
|---|---|
| 1 | Before a change, expect a drop in performance: about 20 percent in one owner's businesses, especially where people are involved (a rule of thumb) |
| 2 | Weigh the sure cost against the possible lift |
| 3 | One owner's minimum: if the change is certain to cost 20 percent, it must offer at least 20 percent |
| 4 | Count the next change too: each new one takes its own drop |
| 5 | One owner's practice: change fewer things; if something changes, it had better be worth it |
| 6 | After a change, leave it alone: some of the biggest gains sometimes come then, and people left alone tend to get better |
8. Where this sits
- Change has a cost, told of one stage of a growing company: SOP 164, section 3.
- Leaving a working monetization structure alone: SOP 11, section 2.6.
- The first question in the order, and doing more of what already works: SOP 187 — Exhaust more before anything else.
9. What this page does not cover
How to run a change once you decide to make it, and how to measure its drop, are not covered on this page.
Terms defined on this page
- Cost of change
- The dip in performance, about 20 percent in one owner's businesses, that a change usually brings at first, most of all when people are involved. A rule of thumb, not a law.