Business Insight Zone

I used to have a manager who overused “order of magnitude.” It was a pet phrase that he rolled out whenever he meant “approximately.” So he would use it even if he were talking about, say, a 10% increase in something: “That would put us . . . order of magnitude . . . call it fifty thousand.”

Of course, if he really meant “order of magnitude,” he would have saved it for occasions when something was going up or down by a power of ten. He was good with numbers, just imprecise in his language.

Sometimes rough estimates are best

But there’s a lesson hiding in “order of magnitude.” Consider these disparate examples:

• When I ask my children to estimate something — how long it will take them to get ready, how many Pokemon cards they have — I encourage them not to be too precise. They’ll often say “I’m not sure” or “Let me count” until I say something like “Do you think you can be ready in two minutes, or twenty minutes?” or “Do you think you have twenty cards, or 200 cards?”
• Warren Buffett doesn’t keep a calculator on his desk, because he doesn’t want to be lured by false ideas of precision. He doesn’t want to buy an asset because he thinks it’s for sale at the sort of discount that requires a calculator to compute; he wants something that’s a clear enough bargain that back-of-the-envelope math is more than adequate.
• Like many bloggers, I can get lost in the weeds of my blog stats, fretting over whether this month’s traffic is 3% better or 4% better than last month’s. Checking the numbers is fine, up to a point, but if you’re really growing a blog’s audience, you should be attempting to grow it by orders of magnitude — from 10 to 100 to 1,000 to 10,000 hits per day.

Decisions arising from scale

From these examples and others, it is often startling to me how many strategic decisions look very different when you apply the orders-of-magnitude test to them. For instance, if you want to raise your personal annual income from $75,000 to $90,000, there are any number of small-to-medium ways to do that — get a raise, max out your bonus, do some moonlighting, work extra hours, etc. But if you want to go from $75,000 to $750,000, you quickly realize you have to change your whole approach.

It’s the same for a business. Part of the reason that Amazon grew so quickly to become a multi-billion-dollar enterprise was that Jeff Bezos and his lieutenants built it to scale that way. It was never going to work as a $20 million company, but it could work beautifully as a $10 billion company.

The choice is yours

I’m not telling you which scale you should pick for your business, or for your personal bankroll. Maybe you want to retire at 55, live in an Airstream, and live a bohemian life like Allen Ginsberg‘s. For that, you could probably live the rest of your life on $100,000 in capital. But if you want to retire at 45 and while away your days at Curtain Bluff, I’d suggest socking away an order of magnitude or two more.

It’s the same with business. Bo Burlingham wrote a whole book about small companies “that choose to be great instead of big.” Maybe you don’t want to compete with Darden — you just want to run the best neighborhood restaurant you can. That’s fine. But if you do want to compete with Darden someday . . . you’d better be sure that all of your decisions line up in that direction.

The moral of the story

Everything I’m saying here seems basic to me — so much so that I’m afraid it may come across as simplistic. But I’m stunned at how often I — and plenty of the smart forks I know or read about — make decisions without making sure to consider such a fundamental point.

Because I’m a copy editor at heart, my old boss raised my eyebrows when he used “order of magnitude” to mean “roughly.” But now that I’ve had many more years observing the world of business, I wish that more people would make “order of magnitude” — in its proper meaning — a regular part of their business lexicon.

~

(Insect photo by Bo_Teo; rhino photo — transposed left to right here — by Martin Pettitt.)