The psychology of precise numbers

201602-google-screenshot-piThe Harvard Business School published a cool article last week. It’s titled “When Negotiating a Price, Never Bid with a Round Number”.

The premise is that precise numbers communicate intelligence. What is precise? Asking for a raise of $4,100, rather than $4,000, for example. The added precision subconsciously tells your boss that you’ve really done your homework and know what you’re worth.

Precision is part of the brand of anyone with a STEM (science, technology, engineering, or mathematics) background. It’s one of the “go to” differences between the hard and soft sciences.

Precision can also work against a STEM professional. Engineers are often dismissed as number crunchers, folks who care more about the eighth decimal place of their analysis than what the customer actually wants.

You have to walk a fine line here. If some of your stakeholders have little to no technical background, they might be impressed when you use precise numbers. At the same time, if your precision isn’t justified, your more discerning stakeholders might think you’re blowing smoke.

As someone with a STEM background, your love of precision makes sense. The greatest insights are often made at the margins. Science is partly built on the pursuit of ever more precise instrumentation. One decimal place can be the difference between a new discovery and months of wasted work.

With your business stakeholders, precision doesn’t play the same role. Rather than pursuing deep scientific insight, your business stakeholders are looking to make the best decision they can, with the information they have.

Does increased precision help them make a better decision? If yes, then great! Be precise. If not, don’t waste your time.

I want to linger here for a minute, because this has been a theme in my own transition from engineering to sales/finance/marketing. The theme is, does whatever I’m doing help someone make a better decision? And if so, how valuable is making a better decision in this context?

You’ll never learn everything about your business. There’s too much there, and it would be crazy inefficient for you to comb through every detail. So, how do you know when you know “enough”? It all comes back to what decisions you’d make differently, or what actions you’d take differently, if you knew more than you know now.

Cleary this is an imperfect system. You won’t always be able to guess exactly how valuable an additional piece of information will be. You’ll have to make some judgment calls.

Here is where precision matters. Take the example where we’re trying to learn what ACME Corporation spends on the products and services we offer.

Maybe at the beginning, all we have is an order of magnitude estimate. I’ll say $10 million. It seems more likely that they spend $10 million, as opposed to $1 million or $100 million. It doesn’t take a sophisticated analysis to get to an order of magnitude estimate. You might have to consult someone with more experience at your company, but that kind of guess won’t take long to make.

Now, how valuable is it for us to make a more precise guess? Does it make a big difference to us if ACME’s spend is actually $5 million versus $25 million? Maybe. Maybe not. It depends on what question we’re asking.

If we want to develop our sales strategies for the top 10 spenders in our market, and any customer who spends above $1 million is comfortably in the top 10….then no, it doesn’t matter whether we hone our guess. The $10 million order of magnitude estimate is sufficient to put ACME on our target list.

If, however, the cutoff for the top 10 is right around the $10 million mark, then we should explore further. We might dive into ACME’s financial reports, if they’re a publicly-traded company. We might dig through some historical case studies, where researchers have done a similar analysis for us.

The point is, we need to know how valuable added precision really is. If it’s valuable, then we’re fortunate. Our background affords us a lot of credibility in discussing precise quantities. But if the precision isn’t warranted, then avoid it. It’ll make you look like the goofy engineer some of the sales folks already think you are. That’s the flip side of the psychology in the Harvard Business School article at the top of this post.

There is a time and a place for everything…including precision.

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