Opportunity Cost

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What is ‘opportunity cost’? Put simply, it’s the value of swapping any given resource to acquire or achieve something else. For most of us, this means spending our time or our money.
 
Not many people instinctively think in terms of ‘opportunity cost’. But I’ve learned from my own experiences – having now interviewed many successful people – that a great many of the highest achievers do.
 
Let’s take starting a business as an example. Assuming 95% of start-ups fail, it’s probably a good idea to consider the (very real) possibility that you’ll have to start, and fail, many times before you land upon the idea that might just work. For the opportunity cost thinker, a failure is just one step closer to success, not something to dwell on.
 
What do you really have to lose?
 
Let’s say each venture costs £5000 and 1 year’s worth of time to see if it gets traction. Over 10 years you will have spent £50,000 to be, in the worst-case scenario, extremely knowledgeable about whatever given ventures you’re exploring. The life experience you accumulate in this time will, invariably, make you more employable than the average person. No bad thing.
 
In the best-case scenario, you get lucky and become the captain of your own ship, living your passion and possibly becoming wealthy in the process.
 
I appreciate not everyone is built for entrepreneurship, but the same can be said for job hunting. In transitionary phases between one job and another, many people will panic and take the very next opportunity that arises. Of course it’s financially beneficial in the short-term. But if you factor in that time as an opportunity cost, you’re set to gain much more long-term, both financially and in potential happiness, by finding the right opportunity, rather than the first one to find you.
 
I can hear people saying, ‘that’s all well and good if you can afford to do it, but what if you can’t?’
 
Well, here’s the good news. Like anything else, with a bit of initiative, even opportunity costs can be gamed. Here’s an example…
 
A few months ago I was introduced to a guy called Alin Cotovanu. Alin is in the process of starting a high-end fashion brand, starting with men’s shoes. He had very little start up money, but all the passion in the world. He knew that to get good people behind his project, he’d need a good brand identity. Someone suggested me.
 
The first time I met Alin was in a coffee shop in central London. He asked me how much I would charge him to work on his brand. I told him how much it would cost him, and as is often the case, it was more than he expected.
 
Okay he said, I can’t afford it now, but when I can, I want to use you. Before I left, I went to square up on my lunch and coffee but he insisted on paying.
 
Very kind, I thought.
 
The next time I caught up with Alin, we were updating each other on our endeavours, and before I left, he very casually gave me a pair of glasses; he saw them when shopping and thought I would like them.
 
Very, very kind, I thought.
 
The next time I saw Alin, having heard what I was working on, he turned up with two wonderful books to help me with a project I was working on that he knew would be of value to what I was trying to achieve.
 
Very, very, very kind, I thought.
 
Before I left. I said to Alin, ‘you still need a logo?’ ‘Yes’ he said. ‘When I get some down time. I’ll work on it for you, for free, we’re both doing interesting things, maybe we can help each other out as we go?’
 
I don’t make a habit of giving up my time and skills for free. But Alin did something that very few others do, he thought longer term. He invested.
 
Some caring observation of my interests, a few lunches, a couple of coffees, a pair of glasses and two books costs less than one day of my day rate. But Alin understands opportunity cost. He could have been doing the same thing with five other designers for all I know. But, even if that was the case, his generosity would still have been worth his investment.
 
As you can see, you can look at opportunity cost in a multitude of ways. So the next time you want to start something, I recommend starting by assessing the opportunity cost. And if it turns out you can’t afford it, maybe consider how you might use creativity and a bit of foresight, to achieve the same results with a much smaller investment.

Ricky Richards