Opportunity Cost

September 13, 2005

Opportunity Cost
By: Matt Michel

The greatest marketing cost of all is one that’s rarely measured. It’s “opportunity cost.”

Let’s say you have $50,000 to spend on advertising and marketing. Along comes the yellow pages rep with the news that the yellow pages is moving to four color double truck ads that cost $4,000 a month.

If you go with the double truck, you’ll be left with a whopping $2,000 for the rest of your advertising throughout the year. Goodbye home show. Goodbye direct mail. Goodbye newspapers.

The true cost of the double truck yellow pages ad is not just the cost of the ad itself, it’s the cost of the missed opportunities from giving up your other marketing. If you buy the yellow pages ad, the additional calls you will receive must be more than the calls you would get from the other marketing efforts you could use.

Conversely, if you get mad at the yellow pages rep’s smug attempt at blackmail and downsize your ad, resolving to put the yellow pages savings into other marketing, you’ve still got an opportunity cost to consider. This time, it’s the opportunity cost of the yellow pages. This is the cost of the calls you might lose from downsizing your ad versus keeping it the same or going with the double truck.

Opportunity cost shows up in other areas. For example, you run a plumbing company and decide to expand into carpet cleaning. It seems like easy money. The business is similar, but the licensing and technician pay is less.

Before you jump into the business, however, you must consider the opportunity cost to your existing business. By focusing on the carpet cleaning business, you will be taking your eye off your plumbing business. Plumbing will inevitably suffer. Even if it continues to grow, it will suffer because it will probably not grow as fast.

There’s also the opportunity cost of putting money into the carpet cleaning business instead of investing in the plumbing business. You still might decide to launch the carpet cleaning division, but you should do it with eyes open, giving due consideration to the opportunity cost.

Opportunity cost is often expressed as an either/or situation, reflecting scarce resources. An air conditioning company decides to add duct cleaning to its service portfolio. You can only do so much at any time. While you’re getting the duct cleaning business up and running, it’s difficult to add a duct diagnostic business. You put off your planned expansion into another city. In other words, there’s an opportunity cost of focusing on duct cleaning versus something else.

You launch the duct cleaning business and it stumbles. It’s behind plan and off-schedule. You delay other ventures. At some point, you need to consider whether the duct cleaning business is worth it, considering the opportunity cost of delaying these other businesses.

The greatest opportunity cost comes from delays. It comes from putting off doing something you know you should. Every day you delay is a day of lost opportunity. You delay adding a truck. You delay launching a marketing program. You decide to skip this home show.

Delaying might seem like the conservative choice because you aren’t spending any money. True. You also aren’t realizing any revenue. This is the opportunity cost.

Rarely will a small business owner attempt to quantify opportunity costs. This is an exercise reserved for corporate politicians working in the Fortune 500 or big time consultants looking for ways to boost their billing hours. You may not quantify it, but you should be aware of it and consider it.

When you make a choice, there is an opportunity cost to consider. When you delay a decision, there’s also an opportunity cost to consider.

Source: Comanche Marketing. Reprinted by permission.
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Copyright © 2004 Matt Michel

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