Don't Ignore Opportunity Costs (16)
One very common mistakes that I often see people make is ignoring opportunity costs in their decision making and analysis.
The concept of opportunity cost is one of the most powerful and yet deceptively simple concepts in economics. In short, every choice you make has alternatives that you could have chosen but didn't. This foregone opportunity is known as opportunity cost. The opportunity cost of a decision is different for every single person, and it changes constantly, based on age, location, state of the economy, indeed an infinite number of factors.
When you calculate the costs of your decisions or your campaigns, you need to add opportunity cost into your deliberations.
What does this mean for IM?
- At a high level, it means that the costs that you bear when you engage in IM is NOT just what you pay to Facebook every month, but also includes ALL the other opportunities that you miss because of the lifestyle/business you pursue. This can mean the income you could have derived from another job, the value of time with your family, the value of leisure activities, whatever.
- At the campaign level, similarly, a campaign with a high "ROI" but that requires constant attention and 12 hours a day maintenance can be much more expensive than campaigns with significantly lower ROIs but requiring much less attention. (This is one of the many reasons why most affiliates' focus on ROI is rather misguided).
So when you make decisions, both in life and in IM, add back the opportunity costs in your deliberations. Your compaigns and your decisions may turn out to be a lot more costly than you initially imagined.
Absolutely one of the best contributors in the forum. Thanks for the great post as always.
This is a very, very good point!
One of the biggest changes in how I approached business was when I incorporated Tom Peters' idea of a "To-Don't List" - a list of things that definitely aren't going to get done because they're not high enough value. It's arguably more valuable to have one of those than a "to-do" list...
A few people have PM'd me asking for some more practical examples, so here goes:
Case Study 1:
Suppose you test out two offers and you find one that gets you 600% ROI while the other only gets you 10% ROI. "Awesome!" you think to yourself. "I read somewhere that once you find a winner, you should milk that for all that's worth", you say, "so I will put all my effort on the 600% ROI offer and I will be balling in no time!"
Is this the right answer?
No, not necessarily.
Suppose the numbers look like this.
Campaign offer 1:
- Spend: $2
- Revenue: $14
- ROI: 600%
- Amount of time required to manage campaign: 10 hours a day
Campaign offer 2:
- Spend: $500
- Revenue: $550
- ROI: 10%
- Amount of time required to manage campaign: 2.5 hours a day
The ROIs here differ by several orders of magnitude. Yet, in this case, going with the lower ROI offer would usually be a better choice for several reasons, including:
1. Extraordinary ROI's are not sustainable. They either do not scale with volume, or they get competed away very quickly. You can see this if you take a look at pretty much every large corporation in the world. 20% net profit margins would be considered amazing (indeed, the gold standard would be a ridiculously profitable company like Google whose net profit margins are ... 21.6%). Indeed, it is not difficult to believe that with more work, campaign 2 can get sustainably scaled to, say, $5000 a day at the same 10% profit margins. It would be unrealistic to believe that the same would apply for campaign 1.
2. The opportunity cost is way too high. Furthermore, if you factor in the opportunity cost of campaign 1, you can easily see that it is actually making a loss. Campaign 1 took 10 hours to generate $12 of profit to you. BUT campaign 2 took just 2.5 hours to generate $50 of profit to you. So if you ditch campaign 2 for campaign 1, you are actually LOSING money. Indeed, if you assume that you can find other similar campaigns as campaign 2, you could be making 4 * $50 (or $200) in the same 10 hours as it takes you to make $12 in campaign 1. So if you factor in opportunity costs, the real ROI of campaign 1 is NOT 600%. This is because your cost is not just the $2 you spent on the campaign, BUT ALSO the $200 that you could have made if you pursed a different route of action. So in fact, this $12 of profit actually cost you $202 to generate. Not exactly the way to "baller" status ...
I hope this is helpful ... I'll write up another case study if there is demand for it.
Originally Posted by ahmedkassem
Always solid content and put into super easy to read formats. Bravo!
Excellent post CM, Angry Russian had a good write up on this too
http://stmforum.com/forum/showthread...rate-on-VOLUME
I wrote a 3 part series on my blog about how to optimize your time by tasks a few months back. On how to logistically do this.
http://www.oooff.com/php-affiliate-s...system-1-of-3/
Always remember what you could or could not be missing out on! Great post
Awesome.
I will browse the forum to look at more of your posts !
Originally Posted by cmdeal
Case Study 1:
Suppose you test out two offers and you find one that gets you 600% ROI while the other only gets you 10% ROI. "Awesome!" you think to yourself. "I read somewhere that once you find a winner, you should milk that for all that's worth", you say, "so I will put all my effort on the 600% ROI offer and I will be balling in no time!"
Is this the right answer?
No, not necessarily.
Suppose the numbers look like this.
Campaign offer 1:
- Spend: $2
- Revenue: $14
- ROI: 600%
- Amount of time required to manage campaign: 10 hours a day
Campaign offer 2:
- Spend: $500
- Revenue: $550
- ROI: 10%
- Amount of time required to manage campaign: 2.5 hours a day
The ROIs here differ by several orders of magnitude. Yet, in this case, going with the lower ROI offer would usually be a better choice for several reasons, including:
1. Extraordinary ROI's are not sustainable. They either do not scale with volume, or they get competed away very quickly. You can see this if you take a look at pretty much every large corporation in the world. 20% net profit margins would be considered amazing (indeed, the gold standard would be a ridiculously profitable company like Google whose net profit margins are ... 21.6%). Indeed, it is not difficult to believe that with more work, campaign 2 can get sustainably scaled to, say, $5000 a day at the same 10% profit margins. It would be unrealistic to believe that the same would apply for campaign 1.
2. The opportunity cost is way too high. Furthermore, if you factor in the opportunity cost of campaign 1, you can easily see that it is actually making a loss. Campaign 1 took 10 hours to generate $12 of profit to you. BUT campaign 2 took just 2.5 hours to generate $50 of profit to you. So if you ditch campaign 2 for campaign 1, you are actually LOSING money. Indeed, if you assume that you can find other similar campaigns as campaign 2, you could be making 4 * $50 (or $200) in the same 10 hours as it takes you to make $12 in campaign 1. So if you factor in opportunity costs, the real ROI of campaign 1 is NOT 600%. This is because your cost is not just the $2 you spent on the campaign, BUT ALSO the $200 that you could have made if you pursed a different route of action. So in fact, this $12 of profit actually cost you $202 to generate. Not exactly the way to "baller" status ...
I hope this is helpful ... I'll write up another case study if there is demand for it.
Great point of view!
I really like this post for when comparing not only campaigns vs campaigns, but campaigns vs other projects/ other things in life. Been thinking about this a lot lately.
I really like the way you talk about it ！Process does matters，sometimes we just focus too much on what will lost，instead of what we have/what we might have!
Thinking in terms of opportunity cost is an essential entrepreneurial skill, otherwise known as “the ability to say NO” to what appears to be opportunity. Chasing after bright shiny objects instead of focusing on your core business is a good way to be mildly successful instead of wildly successful- or to go and stay broke.
Another very valuable concept along these same lines is thinking in terms of “the main focus of effort” in your business, better described by the German word “schwerpunkt.” That simply means focusing on the one thing that allows you to achieve your desired outcome, and making decisions based on whether an opportunity takes you closer to your final outcome (presumably permanent and lasting wealth in business, although each individual answer is different) or takes you further away.
In my business (and really in almost every other business) the schwerpunkt is the building and maintenance of a house list of customers that like me and give me money whenever I ask them (and I ask a lot). So, if an opportunity comes along that does not contribute to that, I take a pass.
I’m in the dating and relationship advice market for men, but I also make it a point to develop my expertise in direct marketing and that leads to opportunities to create money-getting products, sell consulting days, etc. There is certainly money to be made there, but taking the time, energy, and effort to exploit those opportunities takes me farther away from the main focus of effort in my business, so I take a pass. I have given into temptation a few times, and the result is always the same—cash (which is spent) at the expense of getting new customers or selling more to existing customers which would have been far more profitable in the long term.
There is, however, an interesting caveat to this way of thinking. When I come across an opportunity that does not contribute to my main focus of effort, I don’t dismiss it out of hand. Instead I ask the question, “is there an element of this opportunity that I can use in my business that does fit my main focus of effort?”
Often there is. I’ve found my list responds to some money getting offers (not all), positioned as “women don’t like broke dudes, so get this and don’t be a broke dude.” They are affiliate offers, and I can often get the product owner to mail for me, bringing me customers from un-obvious media. Building out a product like this myself would be a fool’s errand, but promoting someone else’s product on the condition they promote for mine too does fit, so that’s a way to turn a “take a pass answer” into a conditional yes.
Another example is Adsense. Way back in 2006 the Adsense Cowboys were riding the range, using every dirty trick in existence. I took a pass on getting into that game, warning them that the party would be over soon (there was no way I’d advertise on the content network then because I knew what these clowns were up to). Sure enough, they were Smart Priced out of existence, and suffered the fate of Vic Mackey (for all you guys who are fans of The Shield, you know what a terrible fate that is).
But I always thought that Adsense might be useful to me at some point, and several months ago I figured out how to use it to offset my cost of opt in acquisition, which fits in quite well with my schwerpunkt because it now contributes to building and maintaining my list. So, what was a NO for 8 years, has now become a conditional yes.
Thinking in terms of schwerpunkt has an added psychological advantage—it keeps you from chasing after opportunities everyone else is chasing, keeps you from worrying that you might be “missing out.” Most things the crowd chases after are “the next big thing that never was,” things that waste your time. However, after the crowds are gone, there is usually something very useful left (such as in Adsense or Amazon Kindle) that can contribute to your main focus of effort.
Pair “schwerpunkt” thinking with opportunity cost thinking (they are very similar animals) and you will be able to make decisions in your business very fast, putting you light years ahead of everyone else. Like Jimmy Johnson, former Dallas Cowboys coach said, “It’s not the good plays that let you win championships, it’s avoiding the bad plays.” Think in these terms, and you will avoid a lot of bad plays.
Originally Posted by bentho
Originally Posted by cmdeal
I only came here to stay for a month and find myself spending more and more time reading all these awesome shares.
Love it.
Home > General > Affiliate Marketing Forum