What is opportunity cost?
Opportunity cost is the value of the next best alternative that is forgone when making a decision. In other words, it is the cost of choosing one option over another.
For example, if you decide to start a business, you are giving up the opportunity to work for someone else. Your opportunity cost is the salary and benefits that you would have earned if you had not started your own business.
How can opportunity cost help entrepreneurs make better decisions?
Opportunity cost can help entrepreneurs make better decisions by forcing them to consider the trade-offs involved in every decision. When entrepreneurs understand the opportunity cost of their decisions, they can make more informed choices about how to allocate their resources.
Here are some examples of how opportunity cost can help entrepreneurs make better decisions:
- Deciding which products or services to offer: When entrepreneurs are deciding which products or services to offer, they need to consider the opportunity cost of each option. For example, if an entrepreneur decides to focus on offering a new product, they are giving up the opportunity to focus on their existing products.
- Deciding which markets to enter: When entrepreneurs are deciding which markets to enter, they need to consider the opportunity cost of each option. For example, if an entrepreneur decides to enter a new market, they are giving up the opportunity to focus on their existing markets.
- Deciding how to invest their resources: When entrepreneurs are deciding how to invest their resources, they need to consider the opportunity cost of each option. For example, if an entrepreneur decides to invest in a new marketing campaign, they are giving up the opportunity to invest in other areas of their business.
Real-life example of opportunity cost in entrepreneurship
A good example of opportunity cost in entrepreneurship is the story of Steve Jobs. When Jobs was starting Apple Computer, he had to decide whether to focus on developing a personal computer or a tablet computer. Jobs decided to focus on the personal computer, which was the more popular option at the time. This decision paid off, as Apple became the leading manufacturer of personal computers.
However, Jobs’ decision to focus on the personal computer also had an opportunity cost. Jobs gave up the opportunity to develop a tablet computer, which was a market that eventually exploded in popularity. Apple was late to the tablet market,and it has never been able to catch up to its competitors.
How to use opportunity cost to make better decisions
There are a few things that entrepreneurs can do to use opportunity cost to make better decisions:
- Identify all of your options: Before making a decision, it is important to identify all of your options. This includes both the obvious options and the less obvious options.
- Evaluate the opportunity cost of each option: Once you have identified all of your options, you need to evaluate the opportunity cost of each option. This means considering the value of the next best alternative that you would be giving up if you chose that option.
- Choose the option with the lowest opportunity cost: The option with the lowest opportunity cost is the option that will give you the greatest overall benefit.
Conclusion
Opportunity cost is an important concept for entrepreneurs to understand. By understanding opportunity cost,entrepreneurs can make better decisions about how to allocate their resources and achieve their goals.
Here are some tips for using opportunity cost in your own business:
- When making decisions, ask yourself what you are giving up if you choose one option over another.
- Consider the long-term opportunity cost of your decisions, not just the short-term cost.
- Don’t be afraid to say no to opportunities, especially if the opportunity cost is too high.
- Be willing to pivot and change your plans if the opportunity cost of your current path is too high.
By following these tips, you can use opportunity cost to make better decisions and achieve your business goals more quickly.
