What is Opportunity Cost?
Opportunity cost is a business term that refers to the value of what you have to give up to choose something else. In a nutshell, it’s a value of the path not taken.
Opportunity Cost: Choosing How to Invest Your Resources
The concept behind this cost is that, as a business owner, your resources are always restricted. That is, you have a finite amount of time, money, and expertise, so you can’t take advantage of every moment that comes along. If you choose one, you necessarily have to give up on others. They are commonly exclusive. The value of those others is your opportunity cost.
Big picture, the opportunity cost is more about the decisions you make than about money or resources. It’s about keeping in mind that one action or choice can preclude you from taking advantage of other opportunities.
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Factors to Consider
So, as another example, the opportunity cost of deciding to partner with Amazon to sell your new product is the potential to partner with other retailers. You have to decide if, given your other choices, this cost is worth it.
In this case, you might weigh:
- Anticipated sales levels
- Length of the exclusive partnership
- Conditions under which you can exit the company partnership
- The amount of traffic Amazon gets daily
- The average value of a sale
- The retail price of your product on Amazon
- Your profit margin
Opportunity cost can be useful in estimating several alternatives to secure that your best course of action has the lowest downside.
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