The Cost of Lost Opportunity

Every businessperson understands that there are costs to doing business. You rent space, hire employees, pay for equipment and material and maybe even do a bit of advertising. Those are easily recognizable costs of doing business. But there is another cost of doing business that not everyone is aware of - Opportunity Cost.

Let’s say that you have $10 in your pocket and a strong desire for something sweet. You head to the candy store and buy 5 Hershey bars. They take your $10 bill and you happily walk down the street eating the first bar. Then your eye catches a sign advertising 5 Hershey bars for $5. If you had shopped around you could have had the same 5 Hershey bars plus $5 left in your pocket. In this case your opportunity cost was $5.

How could this story possibly relate to our business? Sadly, it impacts us every day. For example, every callback takes a technician temporarily out of production. While he is running a no-charge callback he is unable to satisfy another customer. Let’s assume that the average $300 service call produces a 45% profit. Because the technician is tied up on a callback, he can’t earn that profit, so the cost of our missed opportunity is $135 (45% of $300.) But our real cost is higher. First, we paid the technician for his time on the callback and second, a significant percentage of service calls result in new system sales. By not being available to run the service call we may have missed out on a $12,000 sale! (Kind of makes the Hershey bar mistake pale by comparison, doesn’t it?)

Here is another example. In our Commercial Service Division, we have a healthy base of PSA customers. PSA customers can be a great source of repair and replacement revenue but not all PSA customers are created equal. Customer A has 10 rooftop units of varying ages and is very diligent about approving recommended repairs. Customer B also has 10 rooftop units but rarely approves repairs. It costs us exactly the same to perform both PSA’s, but the financial results are very different. The opportunity cost is the profit difference between the two customers. Due to limited staff wouldn’t it make more sense to scrap Customer B and replace him with another Customer A?

The last example is a human example. Suppose you are holding on to a low performing employee. There can be many reasons for this, but it normally comes down to fear of the unknown - what happens if we can’t find a suitable replacement? The fact is that we have never failed to improve our company when we have replaced low performers. And, from an opportunity standpoint, how much benefit could we derive from replacing a low performer with a superstar? You know what the limits are with a low performer, but you have no idea how high his replacement might soar!



There is at least one solution to every problem we face. Don’t allow yourself to grab the first Hershey bar you see because there may be a bigger, cheaper Hershey bar around the corner. There is always a cost to implementing an inferior solution (or doing nothing) because it means that you missed out on a better solution. That’s the definition of Opportunity Cost.