Opportunity cost: the cost of an alternative that must be forgone in order to pursue a certain action (Investopedia)
The easiest way to think about opportunity cost is with time. Choose to spend an hour one way, and you miss out on all the other ways you could have spent that hour. It’s a great way to think about productivity, but have you ever thought about opportunity cost as it relates to the products and services you offer within your business?
It takes a certain amount of resources (time, money, effort, etc.) to pursue a given product or service, and since you only have so much to give in the way of resources, it’s important to choose the ones that are most likely to guarantee success for your business. Choose one, and you limit the resources available to pursue another.
Usually, we’re inclined to go with the options we think will generate the most money, but you have to dig a lot deeper to discover the true opportunity cost associated with a given product or service. Here are just a few of the things to consider.
- Money. With certain products and services, you can demand much higher fees, but often there’s a trade-off of time or cost to you as well.
- Creation/performance time. With every product and service, there’s a set amount of time required of you to actually create it or perform it. Some are more automated, once you put in the initial creation time; some are group-centric, allowing you to leverage your time; others limit you to working with one client at a time.
- Lead generation time. Some products and services, especially big-ticket items, have longer sales cycles, while others require you to generate higher quantities of traffic in order to reach certain sales levels, so it’s important to consider the amount of time and energy required of you to generate customers or clients to purchase the product or service. It might also be important for you to start generating income quickly, and certain products and services can take much longer to generate profit than others.
- Emotional labor involved. It’s not something we usually think about, but every product and service requires a certain amount of emotional labor. Writing a book, for instance, might require a lot more emotional labor from you than meeting with a client for a consulting call. You have to consider how important emotional labor is to you, and if it’s realistic to expect yourself to do emotionally demanding work for long periods of time.
- Long-term stability and sustainability. Some considerations will be more indirect or intangible, like long-term stability and sustainability. For instance, you might prefer doing more work up front, if it ensures greater flexibility and freedom later, or you might want to know that you don’t have to work at an intense pace for too long.
- Growth potential and saleability. Some products and services might limit your growth potential or your ability to sell your business down the road, especially if they require your direct input.
To give an example, let’s take a virtual assistance business, where there are tons of possibilities for potential service and product offerings. As a virtual assistant, you would need to narrow down the list of possibilities to maybe three or four services or products that you thought would be the most successful.
Say you narrowed down the possibilities to individual client services and some kind of how-to guide to sell on your website. Let’s assume you wanted to generate $5,000 per month in revenue for your business. Here’s how the numbers would work out for each option:
Option 1: Individual Client Services
- Hourly Rate for Services: $45
- Average Client Usage: 10 Hours Per Month
- Ongoing Clients Needed: 12
- Time Required to Fulfill: 120 Hours Per Month (Roughly 28 Hours Per Week)
- Monthly Revenue Generated: $5,400
Option 2: Selling a How-To Guide
- Price for How-To Guide: $30
- Sales Required Per Month: 167
- Time Required to Fulfill: Product-Creation Time
- Monthly Revenue Generated: $5,010
Financially speaking, it’s easy to see what you could make with each option, but here are some other considerations. Think about the individual client services to start.
- How long and how much effort would it take you to generate 12 ongoing clients?
- What about locking yourself in to one-on-one client work? Wouldn’t that affect the overall opportunity cost of that option? Yes, but what if you hired a couple of virtual assistants to work on your team? Say you paid them $25 per hour. Now you would need 25 ongoing clients, but you would still make the same amount of money each month, and 100 percent of the work would be delegated to your team. How long and how much effort would it take you to generate 25 ongoing clients? Could you maintain that level if you could devote 100 percent of your time at that point to that task? How hard would it be to sustain that level going forward?
Now think about the how-to guide:
- How long and how much effort would it take you to get to the level where you could generate 167 monthly sales?
- How much effort would it take to maintain sales of 167 per month over the long term?
- What about surviving while you gain momentum and get up to that number of sales? If you had at least a few clients with the service option, you’d make over $1,000, but if you only sold a few copies of your how-to guide, you’d make less than $100 for the month.
There are a lot of things to think about when it comes to the opportunity cost of a given product or service, and in many ways, the decision will be unique to a given business, individual, and situation, but it’s important to carefully evaluate the products and services you are pursuing in your business and not base the decision solely on the money that the opportunity might create. As you weigh the opportunity cost of a given possibility in your business, ask yourself, “What am I giving up in order to do this, and would it be better to spend my resources on something else?”
How did you decide what products and services to offer in your business, and did you consider the opportunity cost?