Profit & Opportunity Cost
I want to dive deep into the importance of understanding opportunity cost.
As a business owner, your priority is… well, running an effective business.
And you can go deep on everything that means…
Keeping happy employees.
Providing the Ultimate Customer Experience.
Obviously there are a ton more… but the thing that is the most important is earning money. If your business doesn’t earn enough money it’s impossible to do anything else.
In order to maximize your earning potential (and this can be done at no cost) you need to understand what the opportunity cost is, as it pertains to the work you do.
Let’s say you’re a really talented handy man. You can do almost anything, and your customer base has all kinds of jobs for you to do. Flooring, painting, tile work, countertop installation.
Should you take it all? If you’ve got a surplus of clients, the answer is generally NO.
The truth is, some work is going to be more profitable than others.
So how do we determine that?
Here is a simple formula that can dramatically change your business.
(Revenue – Materials) / Hours
So let’s look at an example. (These numbers are purely for an example, obviously rates wil vary based on whats being done…)
Option 1 = Tile Work
Lets say there is a 5000$ you expect to take about 40 hours, with 1600$ worth of materials.
(5000-1600) / 40 = 85.00$/hour
Option 2 = Painting
Lets say this job is quoted at 5000, you expect it to take 60 hours with about 800$ worth of materials…
(5000-800) / 60= 70.00$/hour
On the surface, these are both 5000$ jobs. However, when we analyze it… we actually make significantly more money by taking on the Tiling job.
Option 1 actually pays 21% more per hour.
Which means, we should focus our time on option 1.
So whats our opportunity cost? 15$/hour. For every hour that we spend on job 2, we’re losing 15$.
It’s a very different proposition when we look at it this way.
Now, here is the catch.
In order to utilize this, you need to have enough business coming in to actually select the most valuable jobs.
That means your marketing and sales systems need to be dialed in, and they should be dialed in on option 1.
However, decided where you’re going to focus your marketing efforts really is that simple.
So make sure to do this for your own business. Look at the work you’ve done and see… what’s the best ROI for your time.
Let me know what you find!
Steven “Opportunity” Jordan