Imagine if you were able to quit bootstrapping, stop worrying, and multiply your bottom line by cutting your workload in half? It sounds crazy, but if you you’re wearing as many hats as you can… Then that’s exactly what could happen.I’m talking about metrics, time management, and putting your most valuable asset — yourself — where it counts the most.
Put on your thinking caps because I’m going to show you how I calculate my opportunity cost, and how you can apply it to your business.
Firstly: If you’ve never heard about opportunity cost, there’s absolutely nothing wrong with that. It’s something that most grade schools don’t really cover, and that a lot of professors make way too technical and complicated.So what are opportunity costs?Opportunity costs are the costs associated with choosing one option or opportunity over another. For example, if you have the opportunity to invest in an asset like stocks or property but you leave your cash in a regular savings account, the difference in what you would have made is your opportunity cost.
OK, so how can I use it?You want to use this calculation (estimation) to figure out the right way to spend your available resources like time, labor, and money so you can get the maximum return.How can I measure opportunity cost?Opportunity cost is all about perspective, and it’s a powerful tool for gaining clarity in your business.Because it’s about perspective and the perspective is what’s important, you have some freedom in how you evaluate it and you can tailor the same principles to any situation. You can look at the dollar amount after a set amount of time, or you can create a statement that says “For every (blank), I could (blank).” Remember, resources are finite and every situation is different — so don’t obsess too much about exactly how you phrase it.
The point is that you understand the results, and you use that to make smart decisions.You do that with this simple formula: (What you gain) / (What you give up) = Opportunity Cost Ratio for That Opportunity
Let’s compare apples to oranges. Say you can purchase an apple for $1, but an orange for $2. Plug these opportunities into the formula, and you will get these answers
1 apple per $1.
1 orange per $2.
Easy peasy. Adjust these so that they match.
You can change the apples to 2 apples per $2, or the oranges to 1/2 an orange per $1.
Piece of cake!
Now we can factor out the common unit (money) and make the score I mentioned above.
“For every dollar I invest in apples, I could get 1/2 an orange.”
“For every orange I buy, I could get two apples.”
“If I spent $1,000, I could get 1,000 apples… Or I could get 500 oranges… Or I could get something in between.”
Now all you have to do is figure out what you want, and you will be all set to spend your resource (money) wisely.
Think that way about everything and you will quickly find your business in tip-top shape.
Here’s why that matters.
Let’s take a common, real life situation that I see a lot of freelancers struggling with. Say you offer a service that’s worth $20,000 and it takes you an hour to close the deal. You close about half of all your sales calls, so we’ll call this $10,000 per call.
In your next hour, you checked your email and maybe answered a customer service call. You earned nothing, but at least you saved the expense of having someone do it for you.
Well, you just made $10,000/hr.! And now… You’re saving maybe $10/hr. on an assistant. Great! You just made $10,010. Right?
If we evaluate that opportunity cost, then we find out that (say it with me) “For every hour I spend being my own assistant, I give up $9,990.”
“For every $10 I save, I’m giving up $9,990.”
“For every hour I spend closing deals, I could pay an assistant for 1,000 hours of help.”
“For every hour my assistant works, I earn $9,990; and if I wanted, I could spend that on 999 more hours of help.”
You have to measure your time, and you have to be aware of the costs when you choose one opportunity over another.
And now that you’ve figured out your most effective opportunity, you know what you need to do: create more of that opportunity because every day you are choosing to either save $80… Or make $80,000.
That’s the secret of opportunity cost. That’s the power of evaluating it for your business. And that’s how you can quickly figure out what small things you need to give up and where to spend your resources. That’s how you multiply your efficiency to earn more in less time.
Chris is the founder of Chris Evans Marketing. He has been a digital marketing coach and consultant for 3 years, and is author of the upcoming book, “Overcoming Business Obstacles.”