Opportunity Cost is the benefit of taking one business decision over another, the ROI gained by not choosing the “trade-off” (alternate option). While there is no formula to calculate Opportunity Cost, there are ways to estimate it; for example, choosing between a dropshipping business making $500 a day and a retail store making $400. Here, the Opportunity Cost is $500 / $400 = $1.25, meaning that for every $1 earned from the store, $1.25 is earned from dropshipping. For more complex scenarios, a detailed analysis of the advantages, disadvantages, and ROIs of the two options is required.
There are two types of Opportunity Costs:
- “Implicit” are costs that cannot be calculated through accounting (e.g., machinery depreciation).
- “Explicit” are quantifiable expenses (e.g., salaries, rent).
Weighing Opportunity Cost is crucial in project management, resource allocation, and strategy generation because it leads to decisions that make economic sense.