The $500,000 decision

See ClearlyHave you ever been at the optometrist’s office being fitted for glasses, and as he switches from one lens to another, had the “O” on the chart magically change to a “C” or “Q”?  It is amazing how looking through the appropriate lens changes what you see.

The Situation
A company I was working with had been struggling with cash flow and was faced with the choice between leasing one of two retail locations.  The company was already established in Location A.  It was more expensive and clearly a superior location.  Location B was much less expensive, but would not draw the same level of customer traffic.  The difference in cost between these two locations over a 5 year lease term was considerable-nearly a half a million dollars!

The Default Lens: Cost Management
Because cash flow had been difficult, the default lens was naturally drawn toward minimizing expenses.  There were some expenses to be expected in moving locations, and there was bound to be a dip in sales due to the change and less desirable location, but at first glance, Location B at about 1/3 of the price of Location A, looked desirable.

Another View:  Opportunity Cost
As the company weighed the options, I presented an alternative view.  By applying contribution margin analysis, we were able to determine the additional sales Location A would need to generate in order to be economically equivalent to Location B.  Despite the lease being nearly 3 times more than Location B, it only needed 20% higher sales to make up the difference in the lease expense, which seemed well within reach due to the higher customer traffic at Location A.

Sometimes the lens we look through by default makes our vision a little blurry.   Often a trained professional can provide another lens to look through and help us to see clearly, enabling us to make the best decisions for the business.

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