When Free Isn’t Free: The Opportunity Cost Formula

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All businesses, whether they are just starting out or have been around for a while, are tempted by free options. Starting or running a business is by no means an easy feat, so it makes sense to save money wherever possible.

Free options, and in particular trying to do something yourself to avoid hiring a professional, might be tempting, but where you save money on one hand, you might end up paying even more in the long run.

And not just in terms of money.

Each of us is good at something. We have our area of expertise, but few of us are a so-called jack of all trades. The minute you start thinking you can do it all, you’ll start cutting corners when it comes to hiring the right people for the job. Next thing you know, you’re trying to fit into multiple roles in your company and neglecting the one you’re actually good at, to the point where you don’t seem to be good at it anymore.

As Danny Iny said in his excellent article You’re Better Off Working at McDonald’s Than Working in Your Business, “Time is more valuable than money when you’re building a business.

If you’re wasting time trying something you have no skill in, then your real talents (and time) are being wasted.

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Why the Free Option Isn’t Always the Best One

Imagine a scenario where you need to tile your bathroom. To save on labor costs, you opt not to hire a professional tiler. Instead, you buy the tiles, grout, and spacers and try to tackle the job yourself. So far so good.

But the minute you try to start, you realize a few things. First, you need to do some research on how to tile a wall. No biggie. Hop onto YouTube for a couple of hours, and that should get you there.

Now you discover there is some additional equipment you need, such as a tile cutter. Back to the hardware store to fork out some extra money you didn’t count on spending. By now, half the day is gone, and you’re feeling a little frustrated. When you actually start tiling your bathroom, you’ve already spent more money and time than you anticipated.

Now, because you’re not a professional, your tiling doesn’t work out the way you had planned. Perhaps it’s skew, maybe the tiles won’t stick, or the grouting won’t set. Whatever the reason, the job is a mess and you’ll more than likely give up at this point.

But your bathroom still needs to be tiled. So after all the time and money you spent, you still have to hire a tiler. Except now he has to charge you to first remove the tiles you tried to apply, and you’ll have to head back to the hardware store for more grout and probably tiles well.

What started out as an attempt to save some money by not hiring a professional turned into an even bigger cost, in terms of money as well as time.

The Value of Your Time

So Danny was right. When you’re starting a business, there is nothing more valuable than your time. The example of the tiling exercise illustrates the futility of trying to save your business money by attempting to do everything yourself. Not only does it lead to unnecessary expenses, but it also eats into your valuable time.

If you have a target in mind for your first year in business, then this figure will dictate your de facto hourly rate. If you’d like to make $500,000 in a year, and you plan to work nine hours a day for five days a week, then you can essentially say your hourly rate is $500,000 ÷ (9 hours x 260 working days in a year) = $213.68

So the time you take to try and build a landing page or attempt to learn how Infusionsoft works when you don’t have the skills can essentially be billed at $200 per hour. Did you spend three hours trying to figure out how to edit some code on your website? You’ve just lost $600.

What Is Opportunity Cost?

Opportunity cost is defined as the cost of losing an opportunity, i.e. when you make a choice between two options, one of these options is forever lost to you. Much like our tiling scenario, you’ll never be able to go back in time and choose the correct option, which in that case would have been hiring the professional tiler from the start, without accepting the consequences of your first choice.

Once you have wasted your time trying to fulfill a task you don’t know how to do, you don’t have the option of getting that time back. You might make the correct choice later on, but the time you’ve already spent is gone forever.

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Automation Agency Can Help

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About The Author

Carl Taylor

Carl Taylor is the Founder & CEO of Automation Agency. For the past 10 years Carl has been building businesses and marketing them online through the use of Sales Funnels, Email Marketing Automation, Landing Pages, and Wordpress Websites. Carl is also a #1 author and highly sought after speaker and consultant whose work has impacted thousands of businesses across various industries worldwide.