What’s Your Opportunity Cost Costing You?

Every decision we make comes with an opportunity cost. It’s a common business concept - the loss of a potential gain by choosing one opportunity over another.

When it comes to our industry, opportunity costs are often overlooked, but losses can be significant. So how do you know you’re making the right decisions for your business?

While it can be helpful to compare the returns of the two options you’re facing, hindsight regularly comes into play as well. This gives you the advantage of having real numbers to weigh up, and therefore greater accuracy and confidence in your final decision. Additionally, seeing the real figures of how a business decision has affected your profits can sometimes be all the encouragement you need to make a change. 

For example, take a brokerage and imagine they’re in a position where they’re losing money daily. This business is also being targeted by groups, who claim they’ve managed to take millions of dollars from them collectively. They’ve tried some low cost options to reduce this, but to little effect. A meeting is held to discuss the issue and find a resolution, however, they ultimately decide that they can’t bear to invest any further into the problem, believing another high cost injection would not be worth it. What they don’t realise though, is that this opportunity cost far exceeds that of an alternative: investing in software that would protect them from money being lost. While the up-front cost might be substantial, the losses they’re making are far greater.

Factoring in trade-offs is also an important consideration when calculating opportunity costs. For example, how much time are you investing in this decision? Using our example above, you might say that on top of the monetary loss, this brokerage is also spending large quantities of time dealing with organisations who are taking their money, monitoring financial losses, and attempting low-cost solutions that they know are unlikely to be long-term fixes. By investing in pricing & risk management software, they’d have to spend some initial time in setting it up, and then monitoring on an ongoing basis, however this will likely be less time-consuming than their current option and will also benefit other areas of the business at the same time.