Counting the Opportunity Cost of Your Decisions
The art of confident action without regret.
Entrepreneurs are typically risk-takers. We quickly evaluate the potential of a given opportunity, get excited, and launch ourselves into action without ever really pausing to consider the effect this action will have on other aspects of our business. At least, I have been like this in the past… and many of my clients have struggled in this area, too.
While exciting and sometimes admirable, quick decision-making has a negative side. Too often I have found myself stuck with a commitment I regret or shifting away from something (after investing attention and resources to it) because it simply didn’t fit my business long-term. I’ve learned to carefully consider the opportunity cost of my decisions.
What is opportunity cost?
Opportunity cost is the value of something that is given up in order to acquire or achieve something else. This is a concept you may have studied a bit in an economics or business course. The basic idea is related to limited resources such as time, land, raw materials, or money and the reality that using one of these resources for a specific purpose naturally means that resource isn’t available for use in other ways.
Here’s a simple example – -> I currently have $20 in my wallet. If I use a portion of it to purchase lunch today, I won’t be able to spend it on groceries later in the week. The opportunity cost of lunch is a reduction in available funds for groceries.
Opportunity cost is attached to anything finite or limited. We naturally make decisions about how we use our common resources in a context of opportunity cost. But most of us are conditioned to believe finite resources are easily replenished. We take a road trip believing we can easily purchase more gasoline when needed. We binge watch on Netflix without concern because we anticipate having time later to clean the house or mow the lawn.
This casual approach to resource allocation is okay in our personal lives (as long as we keep things balanced), but is more of a problem in business. I’ve learned (the hard way) that my time, focus, and energy are finite. Ignoring these limitations can create a cycle of regret as a leader and crisis as a business.
Consider the opportunity cost of your time.
I was raised with an appreciation for my own ability. This is positive most of the time. However, it creates a problem I call superhero syndrome. I mistakenly believe I can do anything… and I accept challenges accordingly. I overbook my own calendar, agree to too many volunteer and social activities, and accept responsibility for solving problems that aren’t my own. You might think this means I’m a people pleaser. That’s not exactly accurate. I’m actually acting under a false perception of my own ability… and I joke with my team about the invisible cape I wear most of the time.
Here’s the inconvenient truth – -> time is finite, even for superheroes like me. Most activities require a defined amount of time, whether I want to admit it or not. This article, for example, requires writing time. I can track that time, measure it, and plan for it. No magical productivity system, however, will significantly reduce the time required to write an article like this. Additionally, the time I spend doing this work is now unavailable for other work. I can allocate time. I can dedicate time to a specific task. But I can’t actually multiply my time. Once it is spent, it is gone.
Considering an opportunity? Factor in the time required. Be honest with yourself and add a little margin to your estimate to compensate for superhero syndrome. While you may be able to optimize the amount of time required, you won’t always work with superhuman strength. Some days, some times, some seasons we just move a little slower. Think about it… and consider.
Now think about what you’ll need to shift in order to allocate time to this opportunity. What won’t fit if you add this to your schedule? What won’t work inside your business if your team spends time on this opportunity? Every moment only spends once… be aware of how the decision you’re considering will impact your other commitments and plans.
Factor in the cost of your focus.
In a similar way, focus is also finite. We simply don’t have mental bandwidth for unlimited ideas and details. Focus is fluid, changing with the time of day, the season of life you’re in, and your physical health and sense of well-being. Focus is a resource subject to opportunity cost.
Here’s an example to illustrate the limits of focus. I work with creative entrepreneurs in a type of specialized 1:1 consulting I call a Marketing Intensive. Over the course of 8 weeks, we identify and correct messaging and positioning issues, refine the client’s business model to optimize productivity, and create a comprehensive marketing strategy and implementation plan to significantly increase effectiveness and lead generation.
This offer requires me to dive deeply into the client’s business model and messaging, and guide them through a process of intense analysis, ideation, and iteration. Working with a client in this way is hugely rewarding, but also takes up a lot of mental space. I’ve found I can only work with four clients inside this offer at any one time and also comfortably complete the other thought work required in my business.
Sometimes I’m tempted to exceed this constraint and take on a fifth client in this offer. In these moments, I must consider the opportunity cost. What will I be unable to do if I move forward with this client? Will I be able to write these articles? Will other client work suffer? Will I have to step away from some strategic work inside my business for a season? These are things I must consider before going forward.
New opportunities often require a lot of focus and mental energy, especially in the beginning as you are establishing processes and brainstorming solutions. As you consider an exciting new project, think about how the focus required will impact other aspects of your business.
Think also about personal factors that affect focus. If you are balancing a business and the demands of a young family or an aging parent, you may not have the same level of focus as someone in a different season of life. Good things like travel, moving into a new home, or taking on a new pet can limit your focus for a short time. Less positive things like chronic illness, mourning the loss of a loved one or a close relationship, or concern for a loved one in a difficult situation can also create focus limitations. Acknowledge these things and consider them as you evaluate opportunities.
What will you give up in order to pursue this goal?
Every YES is also a type of NO. Often, we agree to a new opportunity or commitment without truly realizing the impact this decision will have on our ability to accept similar offers in the future. I’m recommending you pause a moment or two before your next YES to brainstorm a few of the NOs that are associated with it.
Recently, I accepted an invitation to attend a conference with my daughter. I made this decision willingly because of the support and encouragement I would be able to provide to her during this time and because of the value I will find in the event itself – in both information and relationships. However, before I said YES, I took stock and evaluated the NOs that would follow.
Saying YES to this conference means…
- Adjusting my production schedule and saying NO to client work during that time.
- Allocating financial resources to travel expenses and saying NO to a family vacation.
- Shifting my goals for that time period and saying NO to working on a strategic goal.
I also said NO to time with other family members, volunteer activities during this time, and a certain level of privacy and comfort I will give up in order to travel to the conference location. The single YES to attend the conference came with a bucket full of NOs. Careful decision-making required me to consider those NOs and accept them as a part of saying YES.
Your business functions the same way. When you say YES to creating a new offer, you naturally say NO to the other offers and strategic initiatives you could work on in the same time period. When you say YES and purchase a course, you say NO to the other ways you could invest that time, money, and energy. You also say NO to any similar course or method you might use to acquire the same skill or information.
Counting the cost is the key to confident decision-making.
When I shift my mind from the excitement of a shiny new opportunity to the associated opportunity cost, something interesting happens. I find the clarity I need to make the decision confidently. Evaluating the benefits AND the costs associated with an action gives me time to move away from emotion to a position of reason and logic. Does this mean I always make the right decisions? Of course not! Sometimes things go sideways. But this process limits negative surprises and minimizes the effect any one decision has on the stability of my business.
Interested in learning more about the Marketing Intensive and how an experience at this level can transform your business and lead generation efforts? Let’s talk.