Opportunity cost is what you give up by choosing a particular course of action. It’s a concept that’s extraordinarily easy to forget in daily decision-making — especially in venture-backed startups, when moving fast is a priority and there’s more room for trial and error.
We tend to say yes to ideas that are within budget and will provide an obvious benefit — but it’s easy to overlook the alternatives you may be giving up: by hiring for one position, you’re giving up the opportunity of hiring for a different role. By attending a conference, you’re giving up the ability to spend marketing dollars elsewhere. By pursuing and signing a difficult customer, you’re sacrificing time your customer success team could spend satisfying and growing other customers.
Using an opportunity cost decision framework can help re-orient and improve decision making to drive the outcomes you’re really looking for.
Using Opportunity Costs
As a startup operator, you’re making a wide range of decisions, from which prospective customer to pursue, to who to hire next, to what product feature to build out. The concept of opportunity cost applies to almost every type of decision — let’s walk through an example that an early-stage startup could encounter: You’re deciding whether to engage a particular PR firm for the company’s marketing, branding, and PR management.
1. Frame the Decision by Identifying Your Desired Outcomes
In our example, the goal is to increase positive PR, build the company brand, and drive leads. But zoom out further — the goal of all this is driving more sales, attracting more talent, and ultimately building a stronger company. Considering multiple frames of the goal will help you recognize all of the alternatives later.
2. Evaluate the Direct Cost
Simply put, this is the money and time associated with the decision. When thinking about cost, the cost of your time (or your employees’) is easy to forget, yet it’s one of the most valuable things you have in a startup environment. Take a moment to consciously quantify the time and dollar cost associated with your options. This will help you evaluate alternatives with comparable costs. In our example, let’s say the PR firm costs a monthly retainer of $3,000, and 12 hours/month of your time to manage the engagement.
3. Identify Alternatives and Evaluate Opportunity Cost
Because opportunity cost is what you’re giving up by choosing one course of action, identifying alternatives is a key aspect of this exercise. By deciding to pursue one path and incur the direct cost associated with it, you’re giving up everything else that you could do with that money and time. Zoom out to consider the true goal of your decision, and you’ll be able to see more options and identify the real opportunity cost.
Siloing decisions by function is natural, but ultimately detrimental as it doesn’t allow you to consider all your paths to achieving your desired outcome. In a recent interview at SaaStr, Karen Peacock, COO of Intercom, recounted an unconventional decision she made:
While in her previous role of VP of Marketing at Intuit, Peacock gave a big chunk of her marketing budget to the engineering team. While other marketing leaders were alarmed that she willingly gave up these funds, she explained that she had analyzed the marketing funnel, and decided to invest in an improved customer experience (through product development via the engineering team) in order to lower customer acquisition cost and drive revenue. This turned out to be the best investment for her marketing budget, and one she wouldn’t have considered if she was only thinking about alternatives within a marketing silo.
And Consider This…
Rather than only thinking about what else you could spend that money on, think of the opportunity cost of spending that cash in the first place. When you’re burning more cash than you’re bringing in, each dollar out shortens your cash runway and moves up the timeline of when your team needs to raise additional capital from investors. For each decision that involves a material amount of money, ask yourself: Will this help us hit our company goals and metrics by fundraising time, or would I rather extend our cash runway and give us more time? You’re going to need to spend money to grow, just be sure to consider the cost before you spend.
Move Fast… and Expect More
One of our core values at High Alpha is Move Fast, a common priority of startups that dream of growth, and a huge advantage over larger organizations. Taking the time to go through this framework for every important decision, analyzing all the alternatives and determining the opportunity cost, seems in direct conflict of moving fast. Don’t let the quantity of options be paralyzing, but recognize that investing the time upfront to make a better decision will save time later. Expect More is a second High Alpha core value— we want to make the right decision the first time, limiting the “error” in trial and error. New ideas and opportunities abound, and pausing to consider the true costs and benefits in each decision allows for faster movement on the right opportunities.
