Would you like to be twice as smart & clever as you are now?

Is "saving" money costing you more than you save?

Opportunity Cost is easy to miss when making your calculations. It is easy to see the overt cost but how often do you stop to consider the seemingly hidden opportunity cost of a certain course of action or inaction?

Opportunity cost says that:

a) If I go surfing then I can't be at work to earn money

b) Going to work means I can't go surfing to have fun

This is obvious stuff. A thing we learn as 3 a year old - cake and eating it stuff. Yet all too often in reality we neglect to calculate the real impact that making a decision can have because we only look in one direction.

Every decision has 2 sets of data that are in reality a kind of matched pair (like the surfers in the image): a) obvious, b) inverse. Inverse cost is a little harder for us to see simply because we tend to be ego-attached to the obvious side of the equation. We don't like to see data outside of our comfort zone so we choose to ignore it.

Opportunity cost bites us hardest when we decide not to act. This is because inaction is actually a choice but if not taken pro-actively we are left at the mercy of both of the surfers.

Get more clever

John Ruskin, the Victorian philosopher, said that when purchasing, the lowest cost was rarely the best. If you spent too much on a purchase the most you lost was a few dollars but if you spent too little the repercussions could be dire if the project failed due to poor quality. You could choose a lower price and add in an insurance amount but then you would be better off simply spending that budget on a better product or service that would not fail you in unexpected ways. A wise man indeed.

We can all become 100% wiser simply by remembering to calculate opportunity cost in every decision instead of only what is obvious.

Seeing opportunity cost is relatively easy. Look in the opposite direction to the obvious cost you are considering and ask yourself "what will happen if I don't do this thing?" If you struggle to do this (which is natural) then develop a relationship with a trusted person who you allow to say exactly what they think without fear of your anger and they may help you to see the other side of decisions.

I could refuse to go see Charlie's Angels II with my wife and be happy because the first movie was bad enough. However, if I don't go to this show then I have no hope of getting to see Bruce Willis' next movie. If I do go and have a good time anyway then Bruce is a shoe-in. Remembering opportunity cost has made me a wealthier man.

Try it and you will be amazed at what you see and how much cannier you get.

Examples

In both of these examples you will see that the opportunity cost becomes a kind of tax that dips it's sneaky hand where you don't expect.

Example 1 - a saving on signwriting

I went into a business that had a really faded and tatty sign above the door. It gave the impression the business was a hole-in-the-wall holding-out from the 80's. In reality the business was a growing national concern. When I raised the sign issue I was told that the interstate owner wasn't prepared to spend the money. Times were tight (GFC and all that). Most of their business was to established customers who knew who they were already so the money wasn't worth spending. I said, "Fair enough". Great signs probably cost $2,000 and that could be difficult to part with in scary times.

I then asked the man how he would feel if he was looking to get a new delivery van and when he visited Mercedes their sign looked like his? I asked if they would get his trust and therefore business? His eyes went large and he said, "No". I asked why and he said that Mercedes were a big brand and top quality vendor. A poor sign would make him feel that this was no longer the case. He would start to investigate other vendors.

It was then easy for him to see that saving $2,000 was threatening not only new customers but existing. If he lost one account to a competitor then he would be out of pocket by around $5,000. So he would have 'spent' $5,000 and still have an ugly sign. Not good maths.

Will that sign get repainted? Sadly probably not because while I could get the manager to see the common sense the remote owner will choose not to see till it is something he wants to accept.

Example 2 - a free website

I see this almost every day:

A business wants to have a website to increase their public exposure. Some investigation is done and prices vary from $299 to $5,000 for a simple website. The business owner decides that surely $299 is too little but $5,000 is too much. The owner decides to build the website himself using Wordpress or a similar open-source (free) CMS system to save money. The plan is to: turn the system on, install a pre-made template and pop a few words on a few pages over a couple of evenings and it will all be done. $5,000 saved.

Here are the points where opportunity cost has crept in unnoticed:

Not enough planning or understanding is put into the idea of the website. No specific goals are set so in the emotions of the decider the website has no value. At his point any cost seems hard to accept.
Free seems to be a very attractive option. A few hours of otherwise dead time and bingo a Google traffic magnet. Ok? Watch this -

Researching & choosing CMS platform 3 hours
Installing CMS - 1 hour
Finding and installing Template - 1 hour
Finding images - 2 hours
Preparing Images - 3 hours
Building 4 pages including Writing Copy - 10 hours
Struggling to get it all to work whilst trying to understand the often conflicting opinions you read on the internet - 20 hours

So we have now spent about 40 hours on our website. That is a week of un-billed hours + all the stress. If you value your time at only $25 per hour - a common part time wage - then your "free" site has cost you $1,000.00. If your charge-out rate (what you sell yourself for) is $150 per hour then this site has cost you $6,000 because whilst making this site you could have been undertaking billable work. The maths is no longer so good.

The inexpert cost

The second part of the opportunity cost equation is that if you hire a real expert to help you build your sales platform they know what they are doing and will guide you as well as work much faster. If you have little or no experience in building either a sales flow or website then the odds are strongly in favor that what you build will actually be ineffective. The cost here is that ineffective websites do not sell well. It is exactly the same as hiring a bad salesman and then wondering why sales are poor.

If a good website earned you $100,000 a year in sales but a poor one only earned $50,000 then your "free" website has now cost you well over $50,000. A good website will never cost more than it brings in. Every time that poor website doesn't get the sale it is increasing your opportunity cost not only in the value of the sale but in negative brand value.