Monday, July 16, 2012

The power of incrementality

Small things make a big difference. But sometimes, they dont. Size does matter, calories do matter, but sometimes they dont. 

The rainy season always brings in more troubles and issues, and consequently, newer solutions. The most common NEW solution amongst all is the LONGER-BUT-HAS-LESS-TRAFFIC-AND-IS-LESS-TROUBLING-ROAD that we take to avoid peak traffic jams in the rains.Essentially, we opt for the longer route because it will have less traffic, less potholes and therefore will be a better ride. And in doing that, inevitably, we think about how much EXTRA fuel we consume and how it affects our budget for that month..Don't tell me we dont think about it coz we do. In doing so, and in fretting about the extra fuel, we forget a couple of things. First, the amount of  extra (INCREMENTAL) fuel that we spend, is too negligible when compared to the total fuel we have spent in the entire trip. Yes it costs us a little more, but just a LITTLE more. Secondly, and more importantly, we forget the peace of mind it gives us in avoiding all the traffic, potholes, and in reaching the destination on time. Small may not make a big difference after all.

Take another instance when  EXTRA, MORE, or LESS hardly matter. Those who are regulars at the gym know that obsession with the treadmill and handling that obsession well is the single biggest factor in determining  the effectiveness of the workout. A treadmill of about 20 mins helps us shed around 250 cals. Now, I know people who fret over the extra 1 minute or the less 5 calories. If such a person tread for 19 mins, he is bound to fret about the fact that he will lose less calories. Less how many? Lets find out. When we hope on the treadmill, the first and last minute lose less calories, since the body is either warming up or is cooling down, respecively. Typicall, one loses about 7 calories in each of these 2 minutes, and about 230 calories in the next 18 minutes, a little over 12 calories per minute. Therefore, by not working in the last minute, the person saves only 7 calories, or about 3% of the total 250 calories!! Why fret for the one minute  when you have burnt 243 calories anyway??? Why fret for 3%??

Now, let us take look at situations when small indeed is big..

The best example of small things giving rise to big ones is the case of a savings bank account or of a recurring deposit. With small amounts deducted each month, a recurring deposit hardly does any harm for the time period. However, at the time of maturity, the big lumsum comes as a pleasant surprise, much like an oasis in a desert,  or as a wave of fresh air in a crowded place. Good example of small things making a difference.

In another instance, consider the case of income tax. When you dont pay taxes on time, and delay them, you incur a fine. If for some reason tax is not deducted at source, but if you are eligible to pay tax, then you will have to pay it all at once, at the end of the year. This is so much worse than paying much smaller TDS amounts every month. The same holds true for credit card and other bills. This is a classic case of size mattering.

So whats the point? Incrementality matters. Even when it does not matter, incrementality matters. There is much power in breaking down values into smaller increments, and then comparing these increments with the overall value. Doing so helps us make a better and informed decesion, and in all likelihood, reduces the pain of that decesion if it has to hit us hard. There is much value in analyzing the power of incrementality.

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