Understanding the mathematics of farm businesses was part of my job as a
loan officer fresh out of college. It was during a loan review that my boss, Jack,
introduced me to the concept of the multiplier effect in business. Jack and I
were looking at the numbers of an egg business involving tens of thousands of
laying hens and hundreds of thousands of dozens of eggs produced.
Egg
producers work on slim margins and price changes of tenths of cents per dozen
are big items when multiplied by hundreds of thousands of dozens. Egg producers
gather not only the eggs, but the pennies in their business because of the multiplier
effect. Saving two tenths of a cent on the cost of feed to produce a dozen
eggs can multiply out to tens of thousands of dollars on the bottom line.
Just as significant, a decrease in price of two tenths of a cent per
dozen can factor out to large losses.
You may be familiar with the multiplier
effect as it applies to the economy. The classic example of the multiplier effect
of money introduced into an economy is the construction job example. Dollars spent
in a community to build a sports stadium not only finance the construction project,
but also multiply and spin off in other directions by creating ongoing opportunities
in the food, entertainment, lodging, and service industries associated with a
stadium. Each dollar spent on construction stimulates more spending in other economic
areas. The original investment of money multiplies several times over.
Quite a few years have gone by since Jack and I talked about the multiplier effect
in business, but I never forgot the concept. I see the multiplier effect every
day. Small numbers or small things are the foundation of big results-both good
and bad.
Consider the following as a few examples of the multiplier effect:
- The number of people you know outside of you business or organization,
including customers, prospects, vendors, and competitors is the factor which determines
the base of knowledge you can tap for new products or services or improvements
to your product or service. Not only do you have the 200 people you know directly,
but the indirect access to each of the 200 people each individual knows.
- The
number of people you know inside your business or organization works just
like the example above. The knowledge base of the “tuned in” people within, multiplies
the speed in which you can react to market changes. In the case where two heads
are better than one, you can leverage knowledge to get in or out of specific markets.
- A
condition of multiplier effect blindness can be created in a business where
product demand history is relied upon too heavily for measuring future demand.
As improved or alternative products are added to the consumer menu by competitors,
companies blind to the effects of changing trends in consumer preferences can
lose substantial product sales. Companies structured for massive product sales
can find themselves crippled by failure to see changes in demand developing.
Think about Kodak’s decision to remain with film as digital imaging rapidly replaced
traditional film. The multiplier effect means not only win big, but also lose
big.
As you make decisions about your business this week, month or
year, remember to keep the multiplier effect in mind. Each decision you make may
have deeper and larger effects than first come to mind.
Consideration
of the multiplier effects becomes easier when you plan the time to plan in your
business. If you’d like some help with understanding the multiplier effects in
your business click
here.
