Question

Topic: Research/Metrics

Factoring Opportunity Costs Into Roi Equation

Posted by Kevin McIntosh on 7/14/2008 at 8:43 AM ET 25 Points
Anyone have any thoughts on how to factor opportunity costs into the ROI equation? For example, let's say you're a 1 person biz marketing s service that you bill by the hour at $100. You're currently billing $400 a day but have capacity to bill another 4 hours a day x 5 days a week. Perhaps is there a way to factor in cost per week no mrktg action is taken, or would this simply be an opportunity cost vs marketing investment calculation?
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RESPONSES

  • Posted by adammjw on 7/14/2008 at 9:12 AM Accepted
    I do not quite follow your train of thought.You simply have the capacity to do more and earn some more money in your spare time.
    You could talk of opportunity cost if when instead of doing your service for company X for $100 you could think of using your same 1 hour for a service for company Y at $ 150.Then your opportunity cost would be $50 for same 1 hour unit.

    Adam
  • Posted by melissa.paulik on 7/14/2008 at 9:13 AM Accepted
    Kevin,

    If I'm reading this correctly, this seems more like a marketing investment calculation. I would see it as an opportunity cost calculation if this person were looking at doing less of what he/she is doing so that they can focus on something else that has a higher per hour rate.

    All the best!

    Melissa Paulik
  • Posted by Jay Hamilton-Roth on 7/14/2008 at 9:16 AM Accepted
    If you're sitting around, then there's no change to the ROI. If you're actively networking for opportunities, then the time can be calculated into ROI costs (how much time did it take to get the client?).
  • Posted by Dawson on 7/15/2008 at 8:03 AM Accepted
    It's kind of a "constrained" optimisation problem. In order to allocate the time effectively, you need some expectation on how impactuful the incemental time allocated to marketing will be in creating demand vs. satisfying current demand. There is a time angle to consider in this problem - satisfying demand today vs. creating demand tomorrow,
    John
  • Posted by Kevin McIntosh on 7/19/2008 at 10:49 AM Author
    Thanks for all of your answers! You have all shed some light on this.
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