When making any kind of financial decision, it can be interesting to look at the “expected value” of whatever you’re looking to buy. This can work particularly well for things like raffles and your sales.
With a raffle it’s pretty simple. If you have a 1/100 chance of winning a $500 prize, the expected value of your ticket is $5 (1% of $500). I would guess that the cost of your raffle ticket is somewhere above $5 so they can make a profit.
It works on larger things too. If Publisher’s Clearinghouse is giving away $10M, and your odds of winning are 1 in 140M, then the expected value of your entry is around $0.07. If you have to use a stamp to send in your entry, it’s not a good decision for you to make (not to mention the value of your time relative to $0.07).
Expected value can help with forecasting sales numbers, too. Each week at GreenMellen, Ali and I spend a bit of time working on our “scorecard” for the past week, tracking key metrics that we want to watch as an agency. One of the items we look at is the weighed value of all of our leads, or our total expected value.
For example here, if we send out a proposal for $10,000 and we think we have a 75% chance of winning the work, then our expected value for that job is $7,500 (75% of $10,000). That doesn’t help much for one job, because the real value is either going to be $10,000 or $0.
Where it gets useful, though, is when you have a lot of potential sales in front of you. If you have 20 or 30 leads you’re working on, and you have fairly accurate estimates for the odds of winning each one, your total expected value should be pretty close to accurate.
You can see a bit more about this in a recent presentation that Ali and I did where we showed the items on our scorecard. If you don’t want to watch the full video, you can find the expected value piece around the 10 minute mark.