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What is your opportunity cost?

Wikipedia defines opportunity cost as: “the cost related to the next-best choice available to someone who has picked among several mutually exclusive choices.” You should determine your opportunity cost. Here are some examples to illustrate the point.

I pay a landscaping service $130/month to keep my lawn and gardens looking good. I do not know what tools they use. I do not know how many hours they spend at my home. I do not supervise them. I do know that I can work a few hours and make enough money to pay the landscaper. If I were to perform landscaping myself, I would spend more than five hours/month in my backyard and turn my back on much more than $130 of billable time because I did not want to pay a professional landscaper $130. Even if I did this work on a weekend, I treasure my time and feel the money is well spent.

A lawyer customer asked me to do a small project. I said it was probably a $220 project that I could wrap up in one morning. He chose to do it himself. He bills his customers $225/hour and I later learned he spent four hours on this project. He could have billed his customers $900 for his time and made $680 net after paying me for my time.

Let’s visit my friend, Daphne the Dancer. Daphne wants to send out fliers announcing her grand opening. She orders 1,000 fliers, buys a list of 1,000 names, prints them on labels and starts stuffing envelopes. She says to me: “is this a smart use of my time”?

I reply: “probably not. Let’s look at your opportunity cost. I am assigning your value to Daphne Dance Company at $100/hour. That’s what you are worth, as the President and dance instructor there. If you spend six hours stuffing these envelopes, you will incur a cost of $600.”

“You have another option. Hire the neighbor’s high school daughter to stuff envelopes. You can pay her $10/hour. She will get this done in six hours and free you up to answer the phone or do other things. You can pay her $60 for the work that would cost your business $600 if you personally did it. Daphne, you already know the answer to that one.”

From Escape the Cubicle

 

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