What is Opportunity Cost?
TL;DR
Opportunity cost is what you give up when you choose one option over another. It's the value of the next best alternative you didn't pick.
Example
You have 100,000 kr to invest in your business.
Option A: Hire a part-time marketing person Option B: Build a new feature for your product Option C: Put it in a savings account
You choose Option A (hiring).
Your opportunity cost is the value you would have gotten from Option B or C, whichever was the next best choice.
If that new feature would have generated 150,000 kr in revenue, your opportunity cost of hiring the marketing person is 150,000 kr. Even if the marketing hire works out, you need to ask: did they generate more than 150,000 kr in value?
More everyday examples:
- Spending 2 hours in a meeting = opportunity cost of 2 hours of focused work
- Using your savings for a vacation = opportunity cost of investing that money
- Choosing to build a feature yourself = opportunity cost of the other features you could have built instead
Explanation
The Hidden Cost in Every Decision
Every time you say "yes" to something, you're saying "no" to something else. Opportunity cost forces you to think about what that "something else" is.
The formula is simple: Opportunity Cost = Value of Best Alternative Not Chosen
Why It's Easy to Ignore
We naturally focus on what we're getting, not what we're giving up:
- "I'm getting a new website!" (But what else could that 80,000 kr have done?)
- "I'm learning a new skill!" (But what if you'd deepened an existing skill instead?)
- "I'm adding this feature!" (But what if you'd improved the existing ones?)
Types of Opportunity Cost
Financial: Money spent on one thing can't be spent on another
Time: Hours spent in meetings can't be spent on deep work
Attention: Focus on one project means less focus on others
Energy: Mental energy is finite. Choosing to stress about one problem means less capacity for others.
How to Use It
Before making decisions, ask:
- What are my alternatives?
- What's the best alternative I'm giving up?
- Is my chosen option more valuable than that alternative?
This doesn't mean you should agonize over every choice. But for big decisions, considering opportunity cost leads to better outcomes.
Why It Matters
For Business Owners
Better resource allocation. When you understand opportunity cost, you stop asking "Is this worth the money?" and start asking "Is this the best use of this money?"
Avoid hidden traps. That "cheap" solution might have a huge opportunity cost if it takes your time away from higher-value activities.
Make trade-offs explicit. Instead of vague feelings about decisions, you can articulate: "We're choosing A over B because we believe A will generate more value."
Real Business Scenarios
Hiring vs. outsourcing: Hiring someone full-time might be cheaper per hour, but the opportunity cost includes management time, training, and reduced flexibility.
Building vs. buying software: Building your own tool might seem cost-effective, but what could your developers build instead?
Taking on a project: That new client project brings in revenue, but what's the opportunity cost if it prevents you from improving your core product?
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