EP17: The Trichotomy of Returns with Nic Peterson

ProfitLayer with Timothy Dick - Business building explored layer by layer.

“One of the keys to becoming wildly more productive is understanding the concept of the trichotomy of returns.”Nic Peterson (2:49 - 2:54)

Learn to be efficient with your resources as your business grows.

When your business starts growing, your decisions become more critical. Ideally, you want to minimize your input for a specific return. To make decisions that enable you to maximize your output, you need to grasp the concept of the Trichotomy of Returns.

“When making a decision, you have to decide if the expected return is worth your time, and how it affects your business overall.”

- Nic Peterson (5:53 - 5:59)

Everything you do should go into three different buckets, depending on the return you’re expecting, and the amount of work or resources you think it will entail.

The three buckets in the Trichotomy of Returns.

Disproportionate Returns - The things you do where the returns aren’t proportionate to the resources. The output can be either favorable or unfavorable. Maybe you put in twice the work and get four times the returns. Or you could 10x your investment and only get marginal benefits.

An example of a favorable return is working overtime beyond a certain point. Your hourly return is disproportionately higher when compared to your benefit each regular hour.

Proportionate Returns - This is where your results scale proportionately according to the effort or investment you put in. A good example is the case of an hourly employee. If you work double the hours, you’ll make twice the money (barring any overtime, of course).

Proportionate returns rarely happen in business. If you double your ad spend, very seldom will your revenue double precisely.

Binary Returns - This one is simple. You either get a result, or you don’t. It’s like a light switch. If you switch it on, you’ll have light. If you hit the switch harder, you’re not going to have more light. It becomes problematic in business when the switch is already on, but we keep pushing harder because we aren’t getting more in return. This is typically also where we have the most room to save time money and energy.

“The concept of trichotomy of returns is really something to think about because if you put it into practice and apply it to your decisions, you really are going to be a lot more productive.” - Timothy Dick (7:52 - 8:06)

If you can learn to discern between which bucket your decision falls into, you’re going to become a lot more productive. Remember, unfavorable returns are still returns, and it’s your job to decide if those results are the best use of your resources.

How to get involvedIf you would like more information about Timothy Dick, and the success businesses have gained through work with him, please visit his website. If you liked this episode, be sure to subscribe and leave a quick review on iTunes. It would mean the world to hear your feedback and we’d love for you to help us spread the word!