Everyone understands the term opportunity: a window of time to make something happen (good or bad). We see this in our personal and business lives, some small, others large. But in the end, each is a window for potential change.
In business, we live for opportunities — even the slightest sliver of light allowing us to seize an advantage. A competitor’s stumble, applying new technology to a problem, or discovering a market being underserved or ignored.
But how about the yin in this yang arrangement — opportunity cost — and how does it impact our business outcomes?
In simple terms, opportunity cost is the value of what you give up when choosing to invest your time and resources in one effort instead of another. And opportunity cost can be passive or active — yes, sitting on your butt counts, too.
Failing to recognize that trade-off can be an expensive mistake.
A friend was telling me about a great project they'd launched — and the project is, without a doubt, a super idea with a solid target audience and the potential for identifiable returns. But when I asked about the revenue component, crickets appeared.
And as you've likely heard before, “it is going to get us a lot of goodwill and make people happy about our product/services.”
In business, the “if you build it, they will come” approach rarely measures up — or contributes to the bottom line. As crude as this sounds, you must know whether you're going to make a buck on the effort — and it better be measurable. Overhead is not free. The question becomes whether the investment produces enough value relative to the alternatives.
Let's say you've got an idea — hosting a community recognition event. Rent a space, hand out warm and fuzzy awards to people, and offer light drinks or food. Minimal costs, right?
Nope.
Odds are you've rented a small, modest space. Maybe you purchased a few awards to hand out. Then you offer light refreshments, make a few banners, and people leave happy and bubbly.
Success, right?
But what about the hidden costs? What about the value of the time and attention you and your team spent — yes, spent — planning, organizing and executing?
In reality, the event itself is simply the tip of the iceberg when measuring costs.
Oftentimes, we spend payroll baked into our overhead like Monopoly Money — free and endless. But the reality is you're paying for every moment someone sits in a conference room, creates a spreadsheet, makes phone calls and diverts attention from the act of making money for the organization.
Say you've got six people on a team spending an hour a week meeting about a project. Each leaves the room with an assignment or two — work to accomplish before the next project check-in.
Now multiply the labor costs: six people times one hour of wages times the number of meetings. Then add another hour of work per person each week to accomplish their assignments. Suddenly, you've got a better handle on the actual time and resources invested.
But here's where opportunity costs tend to get misunderstood.
The wages and expenses are direct costs. The opportunity cost is what those same people could have accomplished had their time and attention been invested elsewhere.
What if the team spent those hours focusing on higher-returning efforts? And what if those efforts were more sustainable, compounding returns going forward?
How valuable would several hundred new contacts with potential customers be? Or what else could be produced with that time — something that reduces operational expenses or uncovers a new market?
And here's another question worth asking: What opportunities passed us by while we were busy working on something else?
Overhead labor and resources are not free. Nor is the time and effort used to accomplish your mission.
Opportunity cost is one of the most undervalued considerations companies and organizations encounter. Anything that consistently detracts from the highest, most purposeful return on your time, efforts and resources deserves serious examination.
When in doubt, ask: “Does this make sense for the brand/company, and does it make money?”
Not every worthwhile effort has to generate immediate revenue. Goodwill, customer loyalty and community relationships have value, too. But that value should be intentional, understood and weighed against what you're giving up to achieve it.
If you can't reasonably answer why the investment is worth making, question the value of moving forward.
The best leaders understand that every yes to one opportunity is a no to another.
Being busy isn't necessarily being productive, and being productive isn't necessarily creating the greatest value.
Be excellent — and manage your opportunity costs as sharply as you do your hard costs.
