Why You Need to Consider Opportunity Cost in Your Business

Why You Need to Consider Opportunity Cost in Your Business

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.

Why You Need to Consider Opportunity Cost in Your Business

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.

I love staying in Airbnb’s all around the world. If you haven’t tried it yet, use this link to sign up and get $30 of free travel credit!

Why You Need to Consider Opportunity Cost in Your Business Horton Brand Strategy

Common Pitfalls of Making the Journey from Penniless to Profitable

Common Pitfalls of Making the Journey from Penniless to Profitable

Do you check in on your numbers regularly? And by numbers I don’t mean social media followers, unsubscribes, or anything like that. I mean the real numbers… the ones that show you if your business even makes you money. The ones you can dig into and find out if your business model is healthy or doomed.

Yeah, those numbers.

Oftentimes, it can feel like digging into your numbers lands you in a dark, scary hole… and even worse, it’s one that you dug for yourself! And if you’re trying to make a difference in the world, a lack of funds could also mean a lack of impact.

But it doesn’t have to be that way. You can go from penniless to profitable by understanding your business by the numbers.

Common pitfalls of making the journey from penniless to profitable

Sure, you could start making more money today by doing things like cutting expenses or getting your marketing ducks back into a nice, neat row. However, if you want your marketing and sales machine to actually make you profitable, you’ve got to fix your pricing. You can have dozens of new leads in a month, but if your pricing is off then you can actually LOSE money for every new customer you bring in the door. Crazy, but true!

Here’s the even scarier thing, though. There are three big pricing pitfalls you can easily fall into right when you finally manage to climb out of the numbers hole.

You see, when you realize that you’ve got to get this pricing thing figured out right now, three things start to happen:

Under the guise of market research, you start comparing yourself to others.

You think you’re just going to spend some time researching the competition to figure out what can charge for your work within the market. But instead of learning anything of value, you fall into the comparison trap.

Here’s how it happens: You create arbitrary methods for measuring how your portfolio compares to someone else’s. Then you stack up your client list or media features against theirs. And finally, you make an arbitrary judgment call about how your pricing should compare to theirs… without a clue about how they run their business, how they define success, what things look like behind-the-scenes, what their specific flavor of “philanthropy” is, and so many other unknowns.

You begin to fear that you can’t charge enough to keep your business up and running… or to support the causes that are so near and dear.

You think you’re doing the smart thing and assessing the demographics of where you live or how much you think your customers will spend on what you sell. But more often than not you’re just limiting yourself unnecessarily.

When you survey the landscape of your market from a place of lack, you end up with a list of everything your customers don’t have enough of… like money, time, appreciation for what you do. Fear takes that list and uses it to justify your prices. Fear tells you that unless you maintain low prices and give discounts, no one will buy from you. Before long, you believe that the only reason someone hires you is because you’re within their budget.

You develop a bad case of imposter syndrome.

All this comparison and fear leads you right into the pitfall of imposter syndrome. Because you’ve opened yourself up to so much self-criticism tied to money, it’s hard to even imagine someone paying you for your products and services. Worst yet, you may find yourself thinking you’re not a worthy advocate for whichever cause you’re supporting.

Each time you try to work on your business, you end up asking yourself why your ideal customer would hire you when they could just work with this other person who knows so much more and doesn’t charge that much more than you. You start to forget all the happy customers you already have and begin to doubt everything about your business.

So what’s the solution? Forget your feelings and trust the numbers.

The numbers don’t lie like your inner critic does. So if you can do the hard work of understanding the numbers behind your business, you can actually price for profit.

When you make decisions using numbers rather than feelings, you can stop trying to sell to everyone. Instead, you’ll tailor your message for the smaller group of people who will deeply connect with your offerings.

When you price for profit, you confidently sell to the people who are the best fit for what you’re selling and no one else. When you’re no longer desperate to get any kind of sale just to pay the bills, you develop more confidence. Now your customers are happier because what you did for them was the perfect solution to their problem… and price had very little to do with it.

Common pitfalls of making the journey from penniless to profitable