“Affordable Loss” refers to the ability of a business to absorb losses and still stay in operation. In other words, it is the threshold where a company can make money without incurring too much negative impact from its poor performance. This term was coined by Kenneth Chang in his article “What’s ‘affordable loss’?” for Forbes.com on May 15th 2014 which discussed how affordable loss had reached an all-time high as businesses were making more investments than ever before but could not afford their lackluster returns that were being generated from these endeavors due to their slow growth rates.,
“Affordable Loss” is a principle that states that the cost of an event should be less than the expected benefits. It’s often used in the insurance industry.
Overnight, I received an email inquiring about “affordable loss,” one of the four variables I discussed in my Wednesday article on Startup Story Planning. These 4 Factors are emphasized by a seasoned angel investor.
I see why the expression “affordable loss” appears to be inconsistent or paradoxical. Wade Brooks, who used it in the Monday presentation from which I derived Wednesday’s piece, made it quite apparent to me and others; yet, I was left with my notes summarizing it. I stated:
Planning, budgeting, and proper administration are all important aspects of a cost-effective loss. “When a corporation is cautious with money, a little amount goes a long way,” he explains. They wouldn’t require angel investment if there was no loss; nonetheless, a large loss signals difficulty.
The person who sent me the email wanted to know more about it, so I apparently didn’t explain it well enough. However, that identical line appeared in my notes for another blog article I was working on, which was a happy coincidence. It’s in the following paragraph (emphasis added):
That isn’t to suggest that entrepreneurs don’t have objectives; it’s just that their objectives are wide and, like baggage, are subject to change during flight. Rather than methodically segmenting clients based on prospective return, they are compelled to go to market as soon and inexpensively as possible, a philosophy Sarasvathy refers to as affordable loss.
That quote comes from Leigh Buchanon’s article on Inc.com, How Great Entrepreneurs Think. Prof. Saras Sarasvathy of the University of Virginia’s Darden School of Business is quoted by her.
So there you have it: an affordable loss is all about going to market as soon as feasible and for the least amount of money imaginable. That’s why Wade Brooks and other angel investors (including myself) adore it. I’d never heard the term before, but it does the trick for me.
(Photo credit: Shutterstock/Marynchenko Oleksandr)
Frequently Asked Questions
What should be considered when calculating affordable loss?
A: Most people typically consider a loss of $1,000 or more as an affordable loss.
What is an affordable loss?
A: An affordable loss is the amount of money one can lose without forcing them to make huge sacrifices in their lifestyle. For example, if someone invested $5,000 into stocks and then lost it all when they were trading, that would be an expensive loss because they had to give up other things like eating out or vacations. If however that person only spent $200 on stocks over a 10 year period with no major losses along the way, it would be considered affordable because there was less impact on their life than if they had lost more money.
What is the affordable loss principle explain with an example?
A: The affordable loss principle is a theory that says the cost of something will be less expensive if there is an option to purchase it with no risk. For example, buying insurance for your car could potentially save you money in the long-run because getting into an accident would mean you dont need insurance anymore and can avoid paying higher premiums once your policy expires
- lemonade principle
- bird in hand principle