How Opportunity Cost Can Help You Make Better Financial Decisions For Your Team
One of the most important principles you learn when taking an economics course is the value of opportunity cost. Opportunity cost is defined as the loss of potential gain from other alternatives when one alternative is chosen. Economists have been discussing the value of this for years, and its relevance to how you make financial decisions for your team is true today.
Below we share how opportunity cost can be applied to help you make better financial decisions for your team.
1. Measuring Team Productivity
One of the most overlooked areas that can contribute to better financial success for your team is measuring team productivity. Better team productivity can lead to better financial outcomes, but a lot of times it gets overlooked because most companies do look into the data around how productivity impacts finance. The best way to frame productivity for your team is around opportunity cost. If you ask yourself, “what is the opportunity cost of a team member of mine spending an hour on one thing versus doing something else? And “how does this other thing impact us financially?”, then you can start to find ways to optimize your team productivity.
2. Determining Compensation Value
Another way opportunity cost can help you make better financial decisions is by determining the compensation value of your employees. Let’s say you run a sales team and you are trying to figure out what would be ideal compensation for your Account Executives. One way to think about this is in terms of opportunity cost. If you were to say that you wanted to pay your Account Executives at the market rate, you might expect a percentage of them to turn down offers or turnover within a year. The more competitive the salary is, the more likely that an AE could potentially decide to work at another company. However, if you were to model out the potential benefit of a 5-10% increase in market salary for an AE, you might see both of those numbers drop. You would then need to ask yourself, “Is the opportunity cost of paying an AE above market value worth the alternative cost that could be associated with a lower offer acceptance rate or attrition rate?” Framing this question in this context can help you make a better financial decision that would benefit long-term revenue growth.
3. Assessing The ROI of Missed Opportunities
A lot of team leaders like to focus on what is helping their team perform at a high level, but it is also valuable to look at what could be the reason behind missed opportunities. Learning as to what causes your missed opportunities can tell you a lot about how you should move forward. The best way to do this is by using opportunity cost. Let’s say you invest in a new marketing solution hoping to gain positive ROI. The cost of you not getting a positive ROI from a particular solutions is not just the exact numerical value that you expected in return, but the cost of you also not allocating that budget to other solutions that can provide you a better ROI. This can help you when you think about investing in new solutions in the future, and can make it easier for you to model out which solution might be a better fit going forward.
4. Investing In Team Development
The last way that opportunity cost can help you is when thinking about investing in team development. Allocating resources to growth and development opportunities for your team members is a controversial area since its hard to assess the ROI of team development opportunities. If you are in a growing company where you hope that the people you hire are able to move up within your organization, team development should be on your radar as a way to make sure that this gets executed the right way. One way you can frame this is by using opportunity cost by asking, “What is the opportunity cost of investing in team development where the potential downside could be poor performance leading to attrition and decrease revenue?” The opportunity cost of investing in team development could be less than the potential downsides of not investing in any growth and development for your team. Framing it this way can make it easier to get C-suite executives onboard and benefit long-term revenue growth.
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