⚖️ Why I focus on opportunity cost not ROI

I recently listened to an episode of the HBR IdeaCast podcast called “Grit is good. But quitting can be, too” and it reminded me about how I make decisions.

After burning out some years ago many years ago, I struggled with the societal view of failure. People default into thinking that quitting something is bad, that it is a failure. Many of the synonyms we have for quitting are also synonyms for failure.

However, quitting isn’t always bad. The trick is knowing what to quit.

If you’re doing something you hate that has little chance of making you happy or helping you achieve your wider goals, you should probably quit.

Quitting in that case looks like a success to me, not a failure. You stopped one thing so you could focus on something better. What isn’t a win about that?

It also doesn’t mean you made a “bad decision” earlier on. You likely made the best decision available to you based on the information you had available at the time. As we learn more we see more “variables” that affect whether a decision is good or bad. We should have the courage to adapt in light of new information. But this is harder than it seems.

I switched the way I make decisions in order to make it easier to quit when needed, and to make it easier to have grit when that option prevails.

Fundamentally, the switch in the way I make decisions boils down to this: Your goal should not be to get a positive Return On Investment (ROI). Your goal should be to minimise Opportunity Costs.

ROI = (Value created - Cost of investment) ÷ Cost of investment

Opportunity Cost = Value of optimal option - Value of chosen option

When people have an ROI mindset, they naturally gravitate towards decreasing cost. A task that has a tiny cost will have a very high ROI even if it creates low value.

Your customers may have this ROI thinking, leading them to try and reduce costs (your price) rather than focus on value (what you provide!).

Opportunity Cost thinking requires you to focus on the highest impact things you could possibly work on and then make those things happen. You focus not on cost, but value.

ROI thinking favors quick wins.

Opportunity Cost thinking favors big wins.

As an entrepreneur, you’re rarely short of things you could be doing to improve your business. You have loads of things that will provide a positive ROI (i.e. the value created is greater than the cost of your resources and time).

You should not be doing most of those things.

When your goal is to minimise opportunity cost, you are forced to focus on the highest leverage work.

What can you do today which will make the biggest difference?

Opportunity cost definition and example

Simplified example of opportunity cost

I shared this in my Work Smart Wednesday newsletter. Want the full set of related insights? You can read them here: https://worksmartwednesday.substack.com/p/work-smart-wednesday-september-11-72e

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