Opportunity Cost and You

How often do you think about opportunity cost? Once in a while? When someone brings it up (like this post)? Once a week? Once a day? Never? Well, whatever your number, you may want to move it up a few notches. Why? Because it’s right beside you every single day.

From the time my two daughters were little (they’re now in their 20’s), I had them repeat a simple phrase you may have used with your kids (if you have them),

“First you make your choices then your choices make you.”

What I wanted them to learn from an early age was that, at any point in time, you have a ton of choices available to you. But whatever choice you make out of all those options, that choice will lead to a set of consequences different than if you made a different choice. So choose wisely.

Inherent in that conversation was this idea that whenever you or I choose one thing, we’re saying “No!” to every other choice we could make. And the cost of not choosing those other options is, “opportunity cost.”

Let me give you some classic examples for business owners.

I. Common Opportunity Costs for Business Owners

A rather frequent conversation I have with business owners is over employees who are underperforming. I’ll have them rate their employees on an ABCDF scale and invariably there will be at least one D or F employee. When I ask, “So why are they still working for you?” They’ll say, “Well, Jill is a single mom. She’s been with us for five years. And I don’t have anyone else to fill her spot.” Can you relate?

So, what’s the opportunity cost of Jill? Well, obviously, the first cost would be the difference between someone in Jill’s job who was performing superbly and Jill’s performance. You also have the cost of your time and others involved in covering for Jill’s underperformance. You also have the opportunity cost of business that could have been closed but wasn’t because you were too involved in dealing with Jill. There’s also the opportunity cost of all the referrals that might have come if you had someone performing that job superbly, that could be generating more business today if you had let Jill go a long time ago. In other words, it’s harder to make a good business decision about Jill if you don’t think about the opportunity cost of keeping her.

Another common opportunity cost that most business owners don’t calculate is the cost of slow implementation or a desire for perfection. In other words, most business owners who put off making a decision fail to calculate into their thinking the cost of not executing quickly.

For example, a business owner may know they need to hire a new staff person. But then they’ll wait for months before actually pulling the trigger, often because of money or a fear of making a bad decision. However, what they rarely calculate is the cost of not having that person in place. How much more business could be done? How many projects could have been completed? How much work on the owner’s plate could have been delegated? And because it wasn’t, how many projects didn’t get done? Etc. Those are all costs, opportunity costs, for not pulling the trigger and getting the right person on the team sooner. There’s always an opportunity cost for indecision or delay.

My final illustration for today is that most business owners rarely ever think about the opportunity costs related to them wasting time. We all waste time. For some of us it’s surfing the net. For others it’s tracking their fantasy football teams during the workday. For others it’s tracking their stocks and investments. For some it’s talking too long on the phone. For others, it’s reviewing documents 10 times to make sure that they’re “perfect.”

We all have our issues. But, that said, what few of us ever do is calculate the opportunity costs related to our inefficiencies. We rarely ever stop and think, “Those 45 minutes that I was tracking my fantasy football teams cost me _______________.” Time I could have spent calling a past client and asking for a referral. Or following up on a prospect. Or working on a new ad campaign. Or searching for a new employee. Or getting that project that’s been dogging me for two months underway.

Opportunity cost is there every single day. We just forget that it’s there.

II. A Few Ideas to Help You Remember

So, what should you do to turn this around? Well here are a few ideas to get you started.

1. Put up a sign

If you want to get fancy you can create a great graphical representation of the following question. But for most of us, we just need a good old 3×5 card that says, “So, what’s the opportunity cost?” Put that up in your office or on your laptop so that you remind yourself that every choice you make has a cost associated to it. If you spend 30 minutes on Facebook and watching YouTube videos on any given day, you better look at your sign more often 🙂

2. Use opportunity cost in your reviews

As you evaluate your week or your business, you might want to ask, “What was the cost of doing what we did last week?” “What did we lose out on that we could have had or experienced?” “What other opportunities could we have taken advantage of that we didn’t?” “What was the cost of our indecision (or pursuit of perfection, or fear, etc.)?

3. Be honest with yourself

We all have issues. If we’re not taking action, there’s a reason why. If you’re not following up with past clients, there’s a reason why. If you’re consistently wasting time doing X, there’s a reason why. If you tolerate poor performance and don’t confront it, there’s a reason why. So, don’t excuse it away. Confront it. Be honest with yourself. It’s the only path toward change!

At the end of the day, to get you and your business to the next level, you have to become a master at choosing the best option out of all the options available to you at that time. But you can’t do that if you’re not thinking about the opportunity cost. Why? Because any time you say, “Yes!” to one thing, you’re saying “No!” to every other option available to you (and some might have a better return that you’re not currently calculating into your decision process).

To your accelerated success!

P.S. If you have some other applications of opportunity cost that you’d like to share, add them to the comments section below (or click here >> if you’re reading this by RSS or email)

Flickr photo by Sequoya

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