Marketing Opportunity Costs


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You Don’t Know What You’re Missing.

Opportunity Cost is a concept often used in microeconomics that weighs the impact of selecting one option instead of another. An opportunity cost is the value of the option not taken when a business makes a decision. For example, if a business is deciding whether to advertise on TV, Radio or Google Adwords, the decision to go with Radio over Google Adwords means that any new business that would have come from the dollars spent on Radio is lost in favour of the impacts achieved through deciding to focus on Google Ads.

Most people, especially business owners, need to understand the concept of opportunity cost better. Every choice we make results in us not choosing something else. In simpler terms, when we say yes to something, we are, in effect, saying no to something else. Opportunity cost matters in the management of our time and marketing resources. Failure to look critically at opportunity costs can hurt a business and hold it back.

Understanding this decision tree is key to maximizing the effect of your limited marketing dollars. It’s especially relevant when competing against strong companies with more assets as you build and grow your business and brand.

Opportunity cost is like a game. Wherever you place tokens, you will have fewer to play or place elsewhere. The question is determining where you will get the greatest reward with the tokens you have to play with. This formula can change as the market shifts, so staying on top of this issue is critical.

You should apply this same level of strategy to your marketing resources.

If you have decided to invest in X (Google Adwords, social media agencies, or less direct costs like free consults and wearing too many hats to save on salaries). You must consider what you are losing out on because of those decisions. Many companies get comfortable with their spending. It’s working well enough, so they don’t relook at their strategy or spend where they could be more effective.

Opportunity cost analysis is critical to lean operations and punching above your weight. Brands and businesses cannot afford to waste resources on fads, trends, or relatively ineffective campaigns that everyone else is doing. There is no shortcut, no magic formula if you are struggling to capture market share. You can either outspend your opponents or outthink them.

Which one are you doing?

In larger corporations, the ROI police look for clear signs of returns for their giant expenditures. This bureaucratic decision-making structure slows the company down and makes it unreactive to changing conditions.

Businesses fall victim to the sunk cost fallacy and pursue campaigns because they are already heavily invested in them. PPC is one of the biggest pits I see businesses fall into– because their competitors are spending big on Adwords, they feel like they must also spend a sizeble amount of their marketing budget for fear of missing out. With so much money already invested, it pains marketing departments and executives to change strategies and find another way to win.

Sunk cost fallacy, also known as the “I-can’t-let-go-of-this-mess” syndrome, is a phenomenon that describes the reluctance to let go of a course of action or strategy because a strong investment has been made. I like to call it the “I-can’t-let-go-of-this-mess” syndrome because the feeling is crippling; the idea of moving away from the idea or concept is extremely difficult to consider, even when it is clear that abandonment would be more beneficial.

The sunk cost fallacy plagues businesses’ ability to think deeply and clearly about the opportunity costs they are missing out on by continuing to invest where the money is not best spent. This issue is also aided by agencies who like to feed the corporations vanity numbers that look good and show that their efforts are effective but are, in reality, achieving very little. I had a client who was paying $60 per click on Google in their industry and was being sold by their agency that this was a normal Cost Per Click. Sure, it could be normal by way of what the big players can afford to spend in that industry, but the question they should be asking is if spending $60 per click for their size of business is the best use of their money. The second and third order of thinking should ask where that money could be better spent and what they are missing out on by spending their limited resources on a medium they can’t compete.

Not all marketing is equal. A quarterly report can’t measure some of the best branding decisions. During downturns, brands choose Adwords over a new website or a better app experience. This decision-making is highly flawed and detrimental to the brand. When people spend less, expertise and brand matter more, and these critical metrics don’t show up on the balance sheet immediately, but they are the secret to survival.

Opportunity cost should be weighed and considered for every brand decision. No matter the size of your business, you have a budget for both time and money. To best use your resources, you and your team must create a decision tree for every decision you make with your finite resources.

Think about this idea this week. Consider where opportunity cost could hurt your business. Figure out your weak areas and what they might cost you. The upside is that only some focus on their weak areas during tough times. Improving your brand now can get you ahead.

Thanks for reading, see you next week.


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