The price of anything is the amount of life you exchange for it. – Henry David Thoreau
Who hasn’t heard those old chestnuts, “There’s no such thing as a free lunch,” or “You can’t have your cake and eat it, too.” These are old-fashioned ways to say that every decision requires the sacrifice of one thing for another.
In today’s world, this is known as Opportunity Cost. Inc.com calls it “the cost of a missed opportunity” in any business situation, and savvy entrepreneurs will consider this “cost” when making a decision between two possible actions or outcomes. A good understanding of Opportunity Cost can help maximize your success in a variety of business—and life–decisions.
Some Helpful Examples
If this is your initial exposure to Opportunity Costs, here are a few good examples. The first two are from the site YourDictionary.com:
- A business owns its building. If the company moves, the building could be rented to someone else. The opportunity cost of staying there is the amount of rent the company won’t get.
- As a consultant, you get $75 an hour. Instead of working one night, you go to a concert that costs $25 and lasts two hours. The opportunity cost of the concert is losing $150 for two hours of work.
An entrepreneur decides to rent retail space in midtown Manhattan rather than choosing a less-expensive location. Not paying a lower price by renting elsewhere is the opportunity cost. The owner of a start-up coffee shop decides to pay for a new espresso machine instead of an ad announcing her business. The espresso machine comes at the opportunity cost of fewer customers and less income for a period of time.
You get the picture. Choosing one thing means not choosing something else. Sort of simple, but far from easy…
Opportunity Costs And Relationships
“Opportunity cost is usually defined in terms of money,” according to Inc.com, “but it may also be considered in terms of time, person-hours, mechanical output, or any other finite resource.”
In my role as an advisor, I focus much of my energy on the opportunity costs of relationship building. I believe strongly that rich, long-lasting connections are made by helping others get what they want and need without looking for something in return.
However, it takes time and energy to build lasting relationships, and time can become costly if not invested well. It is one of our most valuable finite resources.
If a relationship doesn’t develop, we may feel our time and energy have been wasted, but the truth is that there’s a potentially unknown benefit/opportunity in each and every connection that we make. It may show up next week, or you may not see it until years later.
As entrepreneurs and leaders, our job is to weigh the cost of our time and efforts against the results of building one relationship over another or making a connection versus handling other specific business issues.
It takes practice, and human affairs are rarely black and white, but ultimately you can learn how to determine the opportunity cost of a relationship—and whether it’s worth sacrificing something else to build it.
“Wishes cost nothing unless you want them to come true.” – Frank Tyger
Image courtesy of jannoon028 at FreeDigitalPhotos.net