Opportunity Cost
What is opportunity cost? The premis behind this economic concept is that when we are spending our time, money and resources, it as at the detriment of something else that we could be spending our time, money and resources on…..our next best option. For instance, if I spend one hour a night watching t.v., that means I can not be spending that same hour doing yard work, playing with my son, reading a book, etc.
Every time we do something there is a decision we make; should I do this or should I do that. Often the decisions we make are instinctual or really not a big deal. But, sometimes our decisions have a cost greater than just the consequences. That is where opportunity cost comes in.
for example I will use the new Advocare business that my wife and I recently started 4 months ago. It is a direct sales business and it cost us $2100 to get in at the advisor level. We know several advisors in the business making well over $20,000/mo, all for the same $2100 we spent. Lauren and I are currently averaging $1000/mo. Let’s say we stop growing and just stay at that income level. That is $12000 a year. Let’s say we do this for 5 more years. That is a total of $60,000. So a $2100 initial investment can earn me $60,000 over the next five years.
Alright, let’s say 4 months ago I decided not to invest into the Advocare business but instead put the $2100 in a savings account earning 6% interest on my money (which is not available but I used for the sake of this example). At the end of the 5 year period, with 6% compounding interest, my $2100 initial investment will now be a whopping $2810. That is an earning of $710. So my decision to put my money into a savings account equals an opportunity cost of $57190. Now if I decided to just consume the $2100 my opportunity cost would be $58000. Worst yet, it would take me 55 years to earn $56000 in the savings account.
Yes, this is an advocate post for Advocare, but I think it is a very good example of the things we should consider when spending our money and time, and weighing out the initial cost over the long term investment. Now to be fair, parking my money into the savings account requires no further work or effort on my part, whereas investing in Advocare does. But it would require very little effort on my part to earn in 1 year with Advocare that which it would take me 5 years in the savings account.
You are the Brand
I found this to be a very interesting article worth sharing.
Excerpt:
It’s time for me — and you — to take a lesson from the big brands, a lesson that’s true for anyone who’s interested in what it takes to stand out and prosper in the new world of work.
Regardless of age, regardless of position, regardless of the business we happen to be in, all of us need to understand the importance of branding. We are CEOs of our own companies: Me Inc. To be in business today, our most important job is to be head marketer for the brand called You.
It’s that simple — and that hard. And that inescapable.
Combating Loss Aversion
Loss Aversion Definition - Peoples tendency to strongly prefer avoiding losses to acquiring gains.
Concept: Psychologist quantify the pain of loss to be twice as strong as the joy of gain.
For instance: Lets say your stock portfolio is up this quarter netting $10,000 in gains: You are pretty happy.
Next quarter your stock portfolio is down, losing $5000 in value. You are devastated (and probably ready to find a new investment advisor).
How does this affect your business? Loss aversion applies to all of us; you as well as your customer. Your customer has a finite amount of money, which can either be saved, spent on your product or service, or spent on something else. You are competing for that dollar against all other options they have.
They hate to lose. They don’t want to walk away feeling like the made the wrong decision by spending their dollar on your offer and not the other options. If they fell they make the wrong decision it will far outweigh the feeling of joy or satisfaction they will get from your product of service.
This could keep them from making a purchase in the first place.
How to Counter Act Loss Aversion: Make them feel like a winner.
Offer a guarantee of free trial (two potential options).
A money back guarantee will help alleviate their fear of loss because they know that they could simply return it if the do not like it.
A free trial will allow them to test the product before buying. If they like it they will buy it knowing that they are getting good value for their money.
Foreclosure isn’t always a 4 letter word
This is an excerpt from a book I am writing called: “Buyers Guide to Foreclosures.” I would love to hear from you regarding feedback, comments or suggestions on the below statements.
Please keep in mind that I am not an advocate for the banks or foreclosures. I just want you to have a healthy and balanced perspective. The media and others can demonize banks because of the current housing crisis and increasing number of foreclosures, but they don’t always paint the whole picture.
Not all foreclosures are due to corruption and fraud, though that certainly did take place (for more insight into that I recommend Michael Lewis’s book “The Big Short”, which is mentioned later in this book). Sin has been in this world since the fall of Adam and Eve, and there are some who prey on the misfortune of others. But most foreclosures are legitimate, legal and necessary in order for banks to maintain the ability to offer loans (be it for homes, cars, business, etc.) to all of us. As the saying goes, we can’t have our cake and eat it too (which is a misinterpretation of the original saying; we can’t eat our cake and have it too).
However, I would rejoice in the day when foreclosures are no longer necessary because everyone has the means to afford and pay for their homes (and not because the government regulates housing). In that event, I may be out of a job, but I could only imagine that, in that scenario, there would be plenty of work and money to go around and I would happily find something else to do.
