Opportunity Cost

One of the concepts that we apply to our decision making almost daily is the idea of opportunity cost. Opportunity cost is defined as:

the loss of potential gain from other alternatives when one alternative is chosen.

Often times a decision to tackle a new project doesn’t cost us anything monetarily, or the cost is negligible. Examples would be programming a new feature, trying out a new type of promotion, or even picking up a single new product for a product line we already carry. The expense isn’t the deciding factor, our time is. More specifically, what is the cost of devoting that time to the project? If we tackle the project, we’ll likely have to push back other things that we’ve previously deemed to be important.

Typically whatever we come across most recently sounds the best, so it’s tempting to slide that up to our top priority, but in doing so we’re pushing back a less exciting project that might have an almost guaranteed positive long term impact on the business. So the question becomes, is the cost of bumping that project back a few months worth it? Are we OK with losing a few months of that benefit? Sometimes we are, sometimes we aren’t. But we’re always taking that into account.

It’s easy to fall into the trap of “let’s do XYZ, it will only take a few weeks and won’t cost us anything!” when in reality there is this opportunity cost that’s not always evident on the surface but is every bit as important as the actual time and monetary costs needed to complete the project.

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