A while back, I read Launch by Jeff Walker. It’s a good book on online business, and I learned a lot from it. But there is an interesting statement there that I’d like to explore here.
In the book, the author stated that the most important concept in business for him is “opportunity cost.” It means that whenever you take an opportunity, you are giving up another opportunity. This is a fact that many people overlook—but being aware of it will help you make good decisions.
I believe that it’s an important concept not just in business, but also in life in general. While making decisions, always keep opportunity cost in mind.
The fact is: your resources are limited. You can’t do everything you want to do. So it’s important that you use your resources carefully. This concept can help you do that.
Here is how to apply the “opportunity cost” concept:
1. Be aware of what you are giving up.
Many people make decisions without being aware of what they are giving up. They just follow the crowd or follow their impulses. As a result, they waste their resources on something that doesn’t give them the best return.
What you should do instead is to always be aware of what you are giving up. For example:
- Before you buy something, think about the other things you can’t buy as a result (“If I buy this, I won’t be able to buy…”).
- Before you take on a project, think about the other projects you can’t take on because of it (“If I do this, I won’t be able to do…”).
Bill Gates faced this situation when he was about to start Microsoft. Building Microsoft would take a lot of his time and effort. In fact, he would have to give up college for it. That’s the price he had to pay.
Ask yourself: What do I need to give up to take this opportunity?
2. Decide whether or not it’s worth it.
After being aware of what you will be giving up, decide whether or not it’s worth it. Ask yourself: Is this the best way to use my resources? Or perhaps I’d be better off using my resources for something else?
One factor you should consider here is window of opportunity. Sometimes an opportunity shows up for just a limited time. If you don’t take it now, it will be too late.
That was the case with Bill Gates. At that time, the microcomputer revolution was about to begin. There was an opportunity for him (and Paul Allen, his co-founder) to create a software company for that revolution. But that opportunity had a short lifespan. If he didn’t take it right away, someone else would have taken it. Eventually he decided to give up college and start Microsoft.
Is there something with a short window of opportunity among your options? If there is, then perhaps you should give it special attention.
3. Beware of diminishing returns.
After you take an opportunity, remember that diminishing returns apply. Beyond a certain point, further investment in that opportunity will give you less and less return.
This means that you need to assess your opportunity cost every now and then. Who knows? It might be time for you to move on to another opportunity.
That’s what happened with Microsoft. In the initial years, Microsoft invested its resources in developing programming languages. But then it switched most of its resources to developing operating systems and applications.
Take a look at the opportunity you are taking and ask yourself: Is this still the best use of my resources? Or would it be better if I allocated my resources to something else?
I believe this is a powerful concept for decision-making. Apply it, and you will make the most of your resources.