Opportunity cost (opportunity cost): definition & its importance to entrepreneurs

Introduction

Every euro and hour you spend on option A, you can't spend on option B. That missed value is called opportunity cost. This article translates the economist concept to entrepreneurial decisions: from "do it yourself or outsource" to channel selection in marketing.

You get a clear definition, a simple calculation rule, and two calculated cases (capital and time). This way you can make choices faster that not only save costs, but above all increase returns.

In short

• Opportunity cost = the value of the best unchosen alternative. So decide relatively (A vs B), not absolutely.
• Rule of arithmetic (for two options): OC = value/contribution best alternative - value/contribution chosen option. Measure in € (cash flow/NPV) or time (hours, time-to-market).
• Practical for entrepreneurs: Make alternatives explicit, estimate cash flows and timing, correct for risk, choose the highest net value. This will prevent "free" internal hours and sunk costs from clouding your decision.
• Mini-example: €100,000 in A (8%) vs B (10%) ⇒ OC = €2,000 in year 1.

What are opportunity costs?

Opportunity cost is a concept from microeconomics. The definition reads:

Opportunity cost is the value of the best unchosen alternative.

So you always compare options relatively: what does the best alternative yield that you leave out?

Simple rule of calculation (for two choices)

Opportunity cost = revenue best alternative - revenue of your choice
Choose one metric and stick to it: euros (margin/profit) or time (days/weeks).

Example money

• Option A: €100,000 at 2% interest → €2,000 per year
• Option B: use €100,000 to pay off a 6% loan → €6,000 interest saved
• If you choose A, then opportunity cost = €6,000 - €2,000 = €4,000 per year

Example time

• Building it yourself takes 2 weeks; outsourcing can start tomorrow
• Each week of delay costs €5,000 gross margin
• If you choose to build yourself, then opportunity cost = 2 × €5,000 = €10,000

Here's how to apply it (3 steps)

• Write down your best 2-3 alternatives.
• Estimate the return per alternative over the same period (e.g., per month or per year).
• Take the highest revenue and subtract the revenue from your chosen option. That difference is your opportunity cost.

More than two options? Always compare with your best non-chosen alternative.

Explicit and implicit costs

Not all costs leave a trace in your accounting records. Explicit costs are the easy ones: the receipt from the supplier, the invoice from the agency, the salary of an employee. You see them, you book them, done. Implicit costs are more insidious. These are the things you leave out: your own time that doesn't go to client work, a product launch that's live a month later, a delivery van that sits idle while trips are missed. No one sends you a bill for that, but it does tick up.

Suppose you are hesitating between building a campaign yourself or outsourcing it. You see the agency's hourly rate right away (explicitly). But if you do it yourself, you might spend three evenings, slide a quote for a warm lead, and miss out on revenue that would otherwise come in (implicit). If you count only by the hourly rate, then doing it yourself seems cheap. If you include the missed deal and delays, then the picture tilts.

A helpful thought: if there's a receipt, it's explicit; if it's in your calendar, it's implicit. Both count. The trick is to make those invisible costs equally visible, so that your decisions are not driven by what does happen to be on an invoice.

Why are opportunity costs important for SMEs

Entrepreneurship is choosing with scarcity: scarce hours, scarce people, scarce euros. Every "yes" to one project is automatically a "no" to something else. Opportunity costs put that invisible "no" in the light. You see not only what something costs, but more importantly what it costs to abandon the alternative.

In doing so, you win on three fronts. Speed: faster live means earlier learning, earlier adjustments and earlier revenue. A campaign that runs today and improves 1-2 percentage points per week builds a lead you won't catch up with in three months. Focus: internally "just doing it yourself" sounds cheap, but eats away attention from work that actually makes money. Opportunity utilization: budget that is stagnant in the account or stuck in an overly long backlog deserves nothing-or less-than the best alternative.

A recognizable moment: you hesitate between an extra hire or three months of working with a specialized agency. The salary seems lower than the agency fee. But if you count the waiting time until that hire starts, the familiarization time, and the missed margin in those months, the outcome often tilts. Not because the agency is cheap, but because downtime is expensive.

This framework of thinking also helps in marketing choices. Are you hesitating between two channels? Look not only at cpc or hourly rate, but at what you are missing if you don't use the best alternative: speed in the learning curve, quality of leads, lead time in your sales funnel. This way you avoid the classic trap: the seemingly cheap option that, due to delay or lower quality, turns out to be the most expensive.

Opportunity costs in business operations

As an entrepreneur, you make decisions every day: do you take on something yourself, or do you outsource it? Do you hire someone, or wait a while? Do you put money into channel A, or do you prefer channel B?

Opportunity costs make such choices easier and smarter. Below I explain step by step how to do this practically:

Step 1: Make your options clear

Write down clearly what choices you have. Keep it simple and limit yourself to two or three options you are really considering.

Step 2: What does each option yield?

For each choice, write briefly what the return is. Consider, for example, how much profit or margin it will generate, how quickly you will start, or how many additional customers you will bring in.

Step 3: Also look at hidden costs

Your own time seems free, but it never really is. Therefore, estimate how many hours you will spend on it yourself, or how long something will take before it makes money. In addition, remember that quality counts: cheap leads can end up being expensive.

Step 4: Compare and choose consciously

Now take your best alternative and compare it to your preferred option. Ask yourself: what am I missing if I go for my first choice? Is that acceptable? If yes, make the choice. If no, reconsider your options.

These four steps will help you make easier, better choices, and more frequent decisions that really move your business forward.

Case study: run a campaign yourself or outsource?

Suppose you have an online campaign that needs to launch quickly. You can do it yourself, but then you'll be at least three weeks before it runs. Your other option is to hire a specialized agency that can start tomorrow, but you'll pay €4,000 for that.

Option 1 (do it yourself)

• Costs: No direct cost.
• Time to go live: 3 week delay.
• Missed revenue: Each week of delay costs you about €2,000 margin.
• Own time: at least 30 hours you don't spend on acquisition (value e.g. €2,500).

Option 2 (engage agency).

• Cost: €4,000.
• Time to go live: immediate (no lost sales).
• Own time: up to 3 hours of steering (value €250).

Comparison of opportunity costs

• Option 1 has no explicit costs, but you miss 3 weeks × € 2,000 margin = € 6,000 and spend € 2,500 worth of valuable hours yourself. Total implicit cost: € 8,500.
• Option 2 costs € 4,000 plus € 250 of your own time. Total cost: € 4,250.

In this example, explicit costs of outsourcing (€4,000) seem high. But once you look at all the costs-so including the hidden lost revenue and own time-you see that doing it yourself is actually twice as expensive (€8,500).

So with opportunity costs you not only make visible costs clear, but also what you really lose if you make another choice.

Common mistakes with opportunity costs

When entrepreneurs apply opportunity costs, a few mistakes often creep in unnoticed. Here's how to avoid the most common ones:

1. Looking only at direct costs

The most common mistake is to look only at costs that you see directly on an invoice or bank statement. It is precisely the hidden costs (such as lost time or missed sales) that are important for making good choices.

2. Not counting your own time

Many entrepreneurs think their own time is free, but every minute you spend on something, you can't use it for something else that might be more profitable. Your own time always has value.

3. Include past costs (sunk costs).

Money that you have previously spent and cannot recoup (such as a previous investment in a failed project) no longer counts. It's always about what you can still earn or lose now.

4. Excessive optimism in estimates

Be realistic about how much time something costs or how much revenue something generates. Don't overestimate yourself or your team, and don't underestimate how long it will take for an investment to pay for itself.

5. Keep delaying decisions

Avoiding a choice is also a choice, namely a choice for inaction. Entrepreneurs who endlessly weigh the options are incurring high opportunity costs by missing out on opportunities and sales.

By being aware of these five pitfalls, you avoid basing choices on wrong assumptions and structurally improve the quality of your decisions.

Conclusion

• Not all the costs of a choice are visible. Consider also the implicit costs of choices.
• Money and time can only be spent 1 time. Spend them where they have the most impact on business goals.
• Online marketing is a business-critical process for many SMEs and has a major impact on revenue development and business value development.
• The potential opportunity costs of choosing an online marketing partner are thus large and often underestimated.

At Tasmanic, we understand this. We combine smart online marketing with financial insight so that your choices are not only quick, but most importantly, profitable. Contact us without obligation to see what we can do for your business.

Resources

Buchanan, J. M. (2008). Opportunity cost. In The New Palgrave Dictionary of Economics (2nd ed.). Palgrave Macmillan. https://doi.org/10.1057/978-1-349-95121-5_1472-2

Frank, R. H., & Bernanke, B. S. (2018). Principles of Economics (7th ed.). McGraw-Hill Education.

Mankiw, N. G. (2020). Principles of Economics (9th ed.). Cengage Learning.

Henderson, D. R. (2008). Opportunity cost. In Concise Encyclopedia of Economics. Liberty Fund. https://www.econlib.org/library/Enc/OpportunityCost.html

Investopedia. (2023). Opportunity Cost Definition. https://www.investopedia.com/terms/o/opportunitycost.asp