Opportunity cost is an important concept in economics and business, which includes online businesses. In our day-to-day life, we make decisions choosing one option over others. In such a scenario, the cost of not choosing an option is known as the opportunity cost. In other words, while choosing one option, the revenue/value that would have been generated by choosing the other one is the opportunity cost.
Opportunity cost is calculated in terms of money value in businesses. But it doesn’t have to be so always. It can also be understood in terms of time, effort, and satisfaction.
Opportunity cost is the revenue lost because of not taking up a particular option. As the name suggests, it's a cost or liability. Hence, while making business decisions, try to keep the opportunity cost as low as possible.
Examples of opportunity cost
- To define opportunity cost in a simplistic manner, let's take an example of an everyday situation. Suppose you are planning for a vacation, and you have a number of options regarding where to go. After thorough research of cost, comfort, travel experience, etc., you finalize one destination you think is the best. Here, your opportunity cost is the fun that you would have had, if you had chosen the second-best destination.
- Let's take an example of a clothing manufacturing company, to understand opportunity cost in a business scenario. The company has limited resources to manufacture apparel. With the available resources, they have to decide whether to make men’s clothing or women’s clothing, or a combination of both. If they decide to focus on women’s clothing, then the revenue that they would have earned by using their resources to make men’s clothing is the opportunity cost.
- Another example of opportunity cost in business is when you have to decide how to make an online presence for your business. You have two options. One is building an online platform from scratch with the help of a professional website developer. The second option is to go for a free website builder like Strikingly, which will enable you to build your own website within minutes at absolutely no cost. Calculate the cost and revenue for both options. You will realize that choosing a platform like Strikingly will bring down your opportunity cost drastically.
Opportunity cost in niche markets
Calculating opportunity cost is an important part of decision-making in any business. However, it gains more significance when you want to venture into a niche market. A niche market can be defined as a smaller segment of the market that prefers to buy a special product or service. When you are contemplating an entry into a niche market, you need to weigh the advantages and disadvantages of that niche compared to the wider market. This comparison can be made effectively by calculating the opportunity cost.
Let us look at an example of an online organic grocery store. Organic food is gaining popularity in most parts of the world, particularly in developed economies. Though the potential for growth of the organic food sector is high, the market’s current size is many times smaller than the conventional food industry. So, if an entrepreneur decides to sell organic products in his online store exclusively, then he is missing out on the majority of consumers from his target audience. This is definitely a shortcoming in the short-term. But, as people become more aware of organic products’ health and environmental benefits, the customer base of the e-store will grow. Moreover, organic products can be sold at a premium price compared to conventional products. Considering all these factors, the revenue that can be generated by using the online platform to sell conventional food products vs organic food products can be calculated. Choosing the option that gives greater revenue would be the option with a lower opportunity cost.
Image taken from Unsplash website.
Niche markets are not restricted to products alone. It can be about anything ranging from service to digital content. To get a better understanding of non-product-based niche markets, let's consider a blogger. The first and foremost thing that an online blogger should do is to decide their niche. For example, a blogger wants to write about traveling. But, there are too many travel blogs out there. How will they differentiate themselves from others and make a brand of their blog? This can be done by choosing a narrower niche. If their travels are mostly solo, then they can choose the niche of solo travelling. This way, they can target a smaller section of the audience and become the go-to person for information in that niche. Now, opportunity cost will help to decide whether to write about travel in general or focus on solo travel. It can be calculated based on the traffic, advertisement revenue, and reader following that the two alternatives will generate.
How to calculate opportunity cost
Let's look at how to figure out opportunity costs while choosing between two options. The basis on which opportunity cost works is that businesses have finite resources to spend. For example, if an enterprise wants to build a website, they have only a certain budget allocated for that purpose. There may be multiple ways of building a website such as hiring a software engineer, choosing a rudimentary CMS, or going for an advanced website builder like Strikingly.
Firstly, returns that can be generated by taking up each option by investing the same amount of money are calculated. The formula for opportunity cost is the difference between the return from the option you want to choose and that from the best option among the foregone ones. In our example, let’s say the chosen option is Strikingly, and the better of the other two is a basic CMS. The difference between the returns from Strikingly and the other CMS will be the opportunity cost.
Law of increasing opportunity cost
What is increasing opportunity cost? It is the phenomenon observed in businesses, that when resources are diverted to one option, the opportunity cost from the other option goes on increasing.
The law of increasing opportunity cost is an important theory in economics. It states that when we allocate more and more resources to produce one product over the other, then the opportunity cost increases.
There are numerous examples of opportunity costs that follow this law. Let’s say there is an online clothing store that sells maternity wear and babywear. Given that the promotional efforts that the enterprise can make are limited, they decide to focus on advertising their maternity clothing line, at the cost of baby clothing advertisements. As the focus shifts more and more towards maternity wear, the revenue that could have been generated if baby clothing had been promoted goes on increasing.
Image taken from Unsplash website.
To study the law of increasing opportunity cost in a business setting, economists use a chart called ‘Production Possibility Frontier’ (PPF). This chart plots the returns from various combinations of two options in the X and Y axes. To put it in our example, the returns from splitting the resources between maternity and baby clothing promotions in various ratios will be plotted.
Why opportunity cost is important for online businesses
When you want to build an online business, your resources are limited. The amount of money that you can invest in building the platform, human resources that you need to regularly maintain the site, space allocation in the website layout for each product line, etc. are all examples of limited resources in an online business.
Strikingly is a simple yet powerful website building platform that minimizes the opportunity cost drastically. First of all, it is cost-effective when compared to building a website from scratch. You can totally avoid the expenditure of hiring a developer. You can start with a free account on Strikingly to try things out and test the waters. You can even enjoy PRO features for 14 days by opting for a trial.
Image taken from Strikingly website.
Strikingly’s easy-to-use website editor makes the maintenance of a website, a piece of cake. It doesn’t require any specific expertise to manage products and audiences in the Strikingly dashboard. Unlike a stand-alone website, at Strikingly, we automatically take care of the security features of your platform. You can sleep better at night knowing that your platform is immune to any type of malicious attack or hacking. Remember, the opportunity cost is not just about money but also mental satisfaction.
Another important resource that is limited while building an online platform is screen space. There is only a certain amount of content that you can show to your users at once. If you have multiple products or services that you want to attract the user’s attention to, then you are in a fix. Strikingly’s user-friendly templates offer optimized layouts that can hold and convey more information within the given space. This minimizes the effect of the law of increasing opportunity cost.
Image taken from Strikingly website.
Strikingly also cuts down your cost of developing separate platforms for different devices such as desktop, tablet, and mobile. With our advanced responsive design, we help you cater to all the devices from the same platform.
Reduce your opportunity cost with Strikingly
Sign up for your free account on Strikingly today, and get a feel of the website builder. Within a few minutes, you will realize that Strikingly is the best option to bring down the opportunity cost to a minimum. Build your free website today, and gain an edge in the online business game.