Podcast: Opportunity Cost
Whilst this may feel like it’s good for business (cash flow) too few understand the opportunity costs associated in the long term.
In this short video, I tell a story of 2 different types of business owners and how opportunity cost affects them both.
Not a set number of coins just as many coins as they can. Now what Jo does, is he runs over to the pile during his allotted time and he just, because he can’t see, he can’t focus, he just picks up whatever he can grab, one coin at a time, wop, wop, fills up his bag. Times up he’s got, let’s say he’s got ten coins. John on the other hand he’s got great vision, so, he’ll run over to the pile of coins and he can see the more valuable coins, so he’ll look at the $2 coins and he’ll try his best to only pick up $2 coins. Now in his effort he might pick up a 5 cent piece, or a 10 cent piece, but he’ll drop it and then pick up $2 coins. He’ll focus on only picking up $2 coins. Now at the end of his allotted time, he might have less coins.
Let’s say, he’s only got eight. Now even though John has less coins, he’s only ever picked up the most valuable coins. So he’s got eight times two, I’d say he’s got $16. Jo on the other hand just grabbed whatever he could cause he couldn’t see, he just grabbed every different type of coin he could, he got more coins, but he also got a range of different types of coins. So he’s got 5 cents, he’s got a $2 in their, he’s got a $1, 50 cents, and without even putting the exact numbers in, you can see that even though he’s got 10 coins, he’s gonna have a substantially less money, than John over here.
So let’s say he’s end up with $4. So what’s the point of this story? What’s the point? Jo here is like a lot of entrepreneurs and business owners who start out. They’re hungry, they wanna get everything they can and they see that pile, they see that opportunity, they see the market and they grab everything they can get their hands on. They really wanna just take every opportunity they can, but John here he’s been doing it for a while and he’s got better vision, he’s got better focus. He knows that if he tries to pick up every single coin, he’s gonna lose out on better opportunities, he’s gonna lose out on picking up the $2 coins. So even though he might only be picking up less, eight, he’s gonna make more overall and for less amount of effort. So the point I’m trying to make here is opportunity cost. Opportunity cost is absolutely real but people have trouble, understanding it or measuring it.
So the opportunity cost for John is if he was to go out and he’s picked up a 5 cent piece, a lot of people would say, well, he might as well just put it in his bag ’cause then he’d have five cents more. Wrong, ’cause that’s an opportunity cost to pick up a $2 coin. And that’s the same thing a lot of people just try to take any bit of work they can, they’ll chase after jobs just because it’s coming in and they’re desperate. So they’ll pick up all these five cent pieces that I’ve taken these jobs. They think, well, it’s just extra money coming in. But it’s wrong. It’s that opportunity cost, to actually acquire a more valuable client. And so at B2B Leads and me personally, I’m very adamant about focusing on, what are your inputs and outputs, what’s your cost per client acquisition, and what’s the return, on the work that you do? And when you know these things about your business, you can say, okay, well, if I take on this work, this is likely to be my return.
But if I know my cost per acquisition and the time it takes to acquire a new client, that time could be better put into something else, something more valuable picking up the $2 coins rather than just grabbing at everything. So the point, the point is opportunity cost is absolutely real. Don’t be one of those businesses that are desperate and just tries to grab to everything. Have some vision and focus for your business, understand your numbers, understand where you get more value for your money and where you don’t and focus on your time, where you’re gonna get the most value.
But, focusing on just grabbing everything you can, taking on every bit of work you can, is not good for you in the long run and you’ll end up doing more work for less money. So I hope that all makes sense or resonates true. And, if you’re interested in hearing what we do at B2B Leads, when it comes to tracking, measuring and focusing on high value activities, reach out, have a chat, I love talking about this stuff.
That’s it for today, have a good one, cheers.
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