How much could you make if you were selling X instead of Y? How much could you make if you worked a day job? Would you prefer to be compensated in another way (like having more time with your kids)? How much time do you want to devote to the causes you love?
Maybe you’ve been in business for years already and you’re leveling up. Or perhaps you’re just starting out. Either way, the struggle to price your products or services properly — while also keeping your larger, philanthropic goals in mind — is a constant companion, am I right?
The only thing you can actually profit from in your business venture is to price your offerings properly.
To do so, you’ll run a lot of numbers like the cost of supplies, overhead, etc. But one thing that often gets left out of the equation is opportunity cost.
Opportunity cost accounts for what you’re giving up by foregoing the next best thing you could be doing with your time or talents to operate your business. It can also account for pursuing one type of offer over another, whatever the next best option would be for you to sell.
As business owners who are trying to make a difference, opportunity cost can get a bit sticky because we have so much freedom to determine how we want to be compensated. Plus, we are really passionate about the causes we support — it’s not always about money!
So I’ve broken opportunity cost for entrepreneurs down into three main frameworks. You should have these concepts in mind as you restructure your business model, pivot into a new venture, create new products or services for your audience, and, of course, whenever you’re analyzing your pricing.
How much would you make if you had a day job?
You’ve taken the leap into entrepreneurship and now you’re trying to figure out how to price for profit. Even seasoned business owners can struggle with raising their rates out of fear that inquiries will dry up and they’ll be left scrambling for customers.
One way to get yourself out of that fear-based mindset is to consider how much you would make at a day job in your field. For most people it can take awhile to get up that amount (and beyond) when running your own business. However, keeping in mind what you could make by just quitting this entrepreneurship thing and going back to having a boss should give you a jolt of boldness when setting your prices.
You are good at what you do, otherwise people wouldn’t be trying to pay you for it. So be brave and price for profit – because otherwise you’ll have to seek out an employer to do it for you. Another thing “do-gooders” should keep in mind is how much they could donate or volunteer if they had a day job, compared to how much they’re doing with their business model right now.
How much would you make if you sold widgets instead of doohickeys?
I know, I know. But I gotta throw a widget in there every once in awhile in homage to my MBA business classes (those of you with some business school under your belt know what I’m talking about!).
So here’s the thing… most of us have endless options for products and services we could offer. Heck, I wrote a friend’s new Airbnb listing in exchange for a free stay and she immediately got over a thousand dollars in bookings the month it went live. Do I offer copywriting for Airbnb hosts on my website? Nope.
Even though I’m good at it, I’d have to generate so many of those gigs to make what I could make staying in my “zone of genius” of branding and business strategy that it just doesn’t make sense to market that service. And I bet you’ve got a lot of those kinds of talents up your sleeve too.
Here’s the thing, though. You’ve got to look at your potential to profit from each type of product or service you put out there and compare that to the other thing you could offer. Just because you could create a simple, clean website for a client doesn’t mean you should. Look at how much profit you make from materials and time and compare that to the next best thing you could be doing. Looking at your opportunity cost like this can help you avoid losing money by offering the wrong thing or putting too much effort into a smaller side gig opportunity.
How do you really want to be compensated?
As business owners, the whole question of pricing for profit doesn’t always come down to money. Oftentimes, you became your own boss because you wanted to be compensated some other way beyond money. It’s in the communities you help, in the awareness you raise, in the funds you donate. Of course, the business has to make money or gain traction to do those things, but how much money do you really want to take away?
Another way to think about opportunity cost is to assess what you’re giving up in the pursuit of making more money. If you value your time more than money, your mindset needs to lead you toward developing and pricing your offerings in a way that gives you the time freedom you desire.
Take a look at all the ways you’re being compensated and assess the value of those when determining the opportunity cost of pursuing a project or launching a new offering. And “price” those forms of compensation accordingly in your overall pricing assessment.
In this week’s email I shared how I calculated opportunity cost for two side projects of mine, Memphis Type History and Studio688. So if you would like that sort of inside look at my business be sure to sign up to get those.
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