Over the past few months (and even before that, with mentoring), I’ve been evaluating businesses in the many stages of inception – including getting to becoming a start-up. One of the questions I ask of whomever I’m meeting with is, what is the opportunity cost?
An opportunity cost analysis is a useful exercise to run for a company/product idea, a new project or simply assessing a decision to be made.
Conducting an opportunity cost analysis allows you to study possible benefits and risks associated with taking one action instead of the alternative action in an effort to determine if the possible benefits would be worthy of those risks.
This allows you to take assumptions you’ve made about the company/project/decision and run through scenarios with some of the following questions.
How much will it cost in estimated outlay; labor, hard costs (computers/equipment), and time vs. what (revenue/exposure) can be gleaned from the idea in a space of time, such as revenue and/or exposure.
Who else is in the market space? Would you be first? (and can you set the pricing based on being first?)
What is the risk of not doing it? Less revenue, lower market share, or another company will execute the idea. Could the time and money be used elsewhere for a higher benefit?
Like most other information freely available on the internet, there are many examples of analysis questions and examples that could be run through (many including calculus equations).
However, when you own, (or are a part of), a small business (or start-up), determining an opportunity cost can be a challenge. Here’s a marketing example of a friend who owns a photography business.
The photographer is looking to grow their business in the corporate market space within 60 miles of their location. One idea they have to accomplish this is through a direct mail postcard campaign.
Let’s say the postcard cost $2500 to print and mail 500 pieces, ; the mailing list purchase of businesses in the area adds an additional $500, and the graphic designer another $200.
Total money outlay $3200 + time the photographer spends choosing images and writing copy.
My first question is: Is direct mail still an effective marketing tool? Do people still look at their physical mail? (And if so, are there current response rate statistics out there?)
How many jobs booked at what dollar amount would need to occur to recoup the postcard cost? To make a profit?
Are there other marketing avenues opportunities the same $3200 (and time) could be spent at for less risk and higher return?
Are other photographers in the area marketing this way?
Once they she gathers all the information, my friend will able to make a more informed decision based on an opportunity cost analysis.
In looking at the example above… what would you do?