The entrepreneur must understand the mind of the consumer in order to see opportunity costs in the way the consumer sees them.
Opportunity cost is a subjective evaluation on the consumer’s part. How do they look at alternatives when they are considering the entrepreneur’s offer? Would they assign greater value to the aluminum product compared to the stainless steel product? An entrepreneur needs to be able to answer that question in order to calculate how to design a good deal in the consumer’s eyes. Click here to download the PDF
Hunter Hastings talks with Per Bylund about Opportunity Costs. Why is this important? Because, for entrepreneurs, all costs are opportunity costs; and opportunity costs are the only costs. Opportunity cost is the core of economics, and to develop an understanding of how to apply economic principles to real life, it’s the place we must start.
Show Notes
Opportunity cost is the fundamental trade-off. The value of any action or choice is defined by the value of what I am foregoing — of what I can’t do as a result of choosing. If I decide to make my product out of stainless steel, I can’t also make it out of aluminum. The value I create by choosing stainless steel must be greater than the value I gave up by not choosing aluminum.
We calculate opportunity cost as the NPV of different alternatives. The NPV of the second best choice is the opportunity cost of the first.
The entrepreneur must understand the mind of the consumer in order to see opportunity costs in the way the consumer sees them. Opportunity cost is a subjective evaluation on the consumer’s part. How do they look at alternatives when they are considering the entrepreneur’s offer? Would they assign greater value to the aluminum product compared to the stainless steel product? An entrepreneur needs to be able to answer that question in order to calculate how to design a good deal in the consumer’s eyes.
The way to do this is to solve an equation: consumer value = the value of what I am offering minus the customer’s perceived opportunity cost of acquiring it. We must understand what is the first alternative for the consumer (including doing nothing — not buying). That’s one part of the consumer’s opportunity cost. Second, what are the additional opportunity costs of buying — such as the difficulty of getting to the store to buy the product, or the difficulty of ascending the learning curve to use an app. These are the second component of opportunity cost for the consumer — the alternative is not to have to face these costs and may be preferable.
It’s possible to segment consumers by understanding their attitudes to opportunity costs. Book buyers on amazon prefer the low cost and fast delivery. Their opportunity cost is going to the book store, where there is a limited selection and prices are higher. Book buyers who go to the brick and mortar store prefer mingling with other book buyers and perhaps getting a cup of coffee — experiences that are unavailable on amazon. For these consumers, the opportunity cost of foregoing such experiences on amazon is high — so high that it makes amazon’s low price unattractive. These attitudes are held by different kinds of book buyers.
The entrepreneur’s first opportunity cost is the value of choosing another career, such as a corporate job.Many entrepreneurs could make more money — and do so with more continuity and security — as a corporate employee. That’s the opportunity cost. But it may not compensate for the excitement and fulfillment of doing what you love as an entrepreneur. Be sure to calculate the opportunity costs carefully!
Once you’re an entrepreneur, every decision is a trade-off, and calculating opportunity cost is an everyday task it’s important to master. Every resource allocation decision is an opportunity cost decision. How much should I spend on product development, if that means less money for marketing and sales? Whom should I hire versus what tasks should I outsource? Once the decision is made the opportunity cost is locked in. This is especially critical for small and start-up businesses with limited resources and tough cash flow constraints. Always think in terms of opportunity costs when making decisions: what’s the alternative?
The allocation of time is often the most important opportunity cost of all. A classic example is engineering time spent perfecting the product versus getting a just-about-good-enough product to the consumer for evaluation and feedback. The engineering trade-off is that the product is not the best it can be. More time would help. The business trade-off is that customer feedback is the most important resource of all, especially negative feedback which tells you how to improve. Delaying it could be fatal. The entrepreneur must weigh these two alternative uses of time. That’s how the concept of the MVP (minimum viable product) and agile programming emerged. They’re both ways to make the best trade-offs of time allocated to the most important tasks.
The entrepreneur must always be thinking of trade-offs. What am I losing or foregoing by making this choice? That’s the opportunity cost. Calculate it, estimate it and put a value on it. Focus on what you are not doing in order to choose the right thing to do.
https://hunterhastings.com/wp-content/uploads/2019/02/e4e-long-1.jpg3001000Hunter Hastingshttps://hunterhastings.com/wp-content/uploads/2021/03/hh-logo-blk.svgHunter Hastings2019-04-02 13:24:482020-01-22 14:24:477. Per Bylund on Opportunity Cost
https://hunterhastings.com/wp-content/uploads/2019/03/IMG_5262.jpg6401136Hunter Hastingshttps://hunterhastings.com/wp-content/uploads/2021/03/hh-logo-blk.svgHunter Hastings2019-03-28 14:30:232020-08-23 11:43:02Interview on Power Trading Radio
At Economics For Entrepreneurs, we believe that everyone can be an entrepreneur, should they choose to do so. It may take you some time to find exactly your best niche, and a few experiments may be in order. The right mindset, we propose, is to pursue your entrepreneurial goal with belief and commitment, while being sufficiently adaptive to make some adjustments along the path when new information and new learning becomes available.
This week we spoke with Ricky Porco, a young CEO who already has several entrepreneurial experiences to his name. He’s been co-founder of an innovative community-building platform, and of a software development company. He’s also been a marketing, sales and do-it-all guy at a digital marketing agency, and now he runs a service company to help small businesses make the transition from paper to digital – i.e. he’s an entrepreneur who supports entrepreneurs.
Show Notes
Starting entrepreneurship early in life is an advantage. Ricky tells listeners how he started his entrepreneurial career in college, packing a lot of learning into a short period of time. It’s a permanent advantage he’s carried forward with him into every subsequent stage of his journey.
It might take you a few tries to understand what kind of entrepreneurship is best for you. You might expect to switch businesses two, three, four or more times, changing markets, organizations, and business models. Make sure you make your choices purposefully, and commit to active learning from each one.
You might even try life as an employee to learn by comparison. Ricky switched into the role of employee at one stage. He was able to observe how the boss he reported to struggled with management and growth, and learn from it, while gaining confidence in his own skills through his success as a rainmaker for this employer.
You quickly find out the importance of financial management. Ricky quickly found out that he and his co-founders were good a business model design, product development, marketing and sales, but a start-up is financially immature by definition and can easily run out of cash. Without sound and disciplined financial management, all the other skills and capabilities can count for nought.
And you also quickly find out that effective marketing is essential to every business. Some of Ricky’s clients see marketing as optional – “if there are funds left over”. The opposite is true: marketing is a fundamental requirement.
Organizational structure and design is a critical factor in success, and especially in opening information flows. The biggest threat to the entrepreneurial success of a firm is a clogged information flow, when employees or partners don’t have clear direction or timely data. This can easily happen in founder-centric companies and especially in family-owned businesses that tend to be hierarchical.
Digitization is the best opener of information flows: software is organization. One simple solution to the clogged information flow is digitization. Software solves the problem; there’s no hierarchy in Slack.
An entrepreneur plays the role of identifying a need, imagining a future where that need is met, and taking action to assemble the right resources to deliver a product or service which meets that need. The individual who thrives in this role exhibits some special character traits and personal attributes. Our list below outlines some of the core attributes that successful entrepreneurs seem to have in common. Click Here to download the PDF version.
https://hunterhastings.com/wp-content/uploads/2019/02/e4e-long-1.jpg3001000Hunter Hastingshttps://hunterhastings.com/wp-content/uploads/2021/03/hh-logo-blk.svgHunter Hastings2019-03-26 13:15:302019-06-25 11:33:378 Attributes of Austrian Entrepreneurs
Today we talked with Peter Klein about empathy – a critical tool in the entrepreneur’s toolbox. It’s through empathy that entrepreneurs can get into the customer’s mind, understand and identify their needs and wants from their perspective and in their perception.
This is the skill that enables the design of new products, new services, new systems and new solutions. If the entrepreneur has exercised empathy well, the chances of success in the design process are high for the customer to say, “Yes! That’s what I need!” Is empathy a difficult skill to master? Not really. We all have it to some degree. It needs to be applied with a combination of subtlety and discipline.
Show Notes
Empathy is a skill we learn from childhood. We’re taught as kids, when we say or do something that might be unkind or upsetting to another person, to “think about how they must feel”. The vernacular is to “walk in their shoes”. It’s the same essential skill we apply as entrepreneurs.
Entrepreneurs need to master the skill for an audience that might not be in their social circle and with whom they may not be familiar. You may be selling to car buyers, or cooking enthusiasts, or sports fans, or the procurement officer at a client. This kind of empathy is a little bit less natural and a little bit more learned.
It is entirely possible to learn entrepreneurial empathy and to get better at it. You can develop a process of reading and gathering data about the category or market you’re operating in, talking to actual and potential customers, conducting quantitative or qualitative surveys (like focus groups), analyzing the sentiments in social media conversations, or just talking to folks with a viewpoint. You can hire a consultant or an employee with highly developed customer empathy skills. But always, it’s your interpretation of the data that’s the key. What is motivating the customer, what is driving them, what is the feeling that’s at work?
There are plenty of tools. There are market research tools, analytical tools, and all kinds of methods you can use. Learn them on YouTube or an online course. Or use our Entrepreneurial Diagnosis Tool: the Contextual In-Depth Interview.
Think of yourself as a Doctor, performing a diagnosis. Often the patient can describe symptoms, but does not know the underlying cause, and certainly doesn’t know the cure. The doctor asks questions, performs some pattern recognition based on existing knowledge, and perhaps performs some tests to narrow down the possibilities. In the end, the doctor arrives at the diagnosis and the prescription based on skill.
The Doctor analogy extends even further to the cure you are trying to deliver to the customer. Your target customer is not so much looking for something new as they are seeking to solve some dissatisfaction. There is some feeling on their part – a little vague, perhaps, not too well articulated, but nevertheless genuinely felt – that something in their life could be better. Ludwig von Mises called it “felt uneasiness”, which is a wonderfully descriptive expression. As an entrepreneur, you are taking away an uneasiness. The result is a better feeling on the customer’s part – an end to that uneasiness.
This is what entrepreneurs do in a free market economy of mutually voluntary exchange. We persuade customers that they will feel better, be better off, experience more enjoyment, if they buy the product or service we are offering to them. They can be confident of that future feeling because of the empathy the entrepreneur has exercised in developing an understanding of them, their dissatisfactions and their unique individual preferences. The entrepreneurial system is best for everyone because it’s based on empathy.
https://hunterhastings.com/wp-content/uploads/2019/03/Facebook-Banner.png30016834Hunter Hastingshttps://hunterhastings.com/wp-content/uploads/2021/03/hh-logo-blk.svgHunter Hastings2019-03-19 13:15:572024-01-24 15:56:265. Peter Klein on Empathy for Entrepreneurs
