A lesson on opportunity costs from Mo Willem’s children’s book
In Should I Share My Ice Cream by Mo Willem’s, Elephant Gerald is frozen with indecision: should he share his awesome, yummy, sweet, super, great, tasty, nice, cool ice cream with his best friend Piggie or keep it all to himself? As product professionals, we’re often faced with similar choices: should we prioritize Initiative A or Initiative B? Is Feature X the better solution or Feature Y? It is important to make these decisions quickly and effectively. If we fail to move forward, we risk the opportunity melting away entirely, just like Gerald’s ice cream.
What is Opportunity Cost?
Investopedia defines opportunity cost as the potential benefits an individual, investor, or business misses out on when choosing one alternative over another. To formally calculate opportunity cost, simply subtract the return on the chosen investment from the return on the best option you could have taken. Let’s look at a few examples:
For Gerald, the value of ice cream is the joy it brings to the consumer. If Gerald eats the ice cream by himself, his return will be one unit of his own joy. However, if he shares the ice cream with Piggie, Piggie will be joyful, Gerald will be joyful, and there will be the added joy that comes from sharing a treat with friends. In this example, we can see that if Gerald invests all of his ice cream in himself, he’s missing out on the potential joy the ice cream could bring Piggie.
Let’s look at another example from Product Management. We are debating the priorities of two features. One is expected to decrease the number of incoming support tickets by 40%. Another is projected to increase our weekly revenue by 5%. The right choice for your company will depend on the size of your customer support queue and your weekly revenue.
Let’s say the customer support feature will take you 4 weeks to build, test, and release. If you build the revenue-generating feature first, you can capture all of the new revenue while fixing your customer support issue. This sounds good at first glance. More revenue is always great. However, if your revenue is small but your customer support team is large and expensive, saving 40% of their time may actually save you more in operational costs than the new revenue that came in. When making this comparison, we also need to consider the confidence level we have in our value estimates. For example, what if that revenue-generating feature was forecast with a high degree of uncertainty and may only bring in half the revenue? This makes it even riskier to build that feature first if our customer support-focused feature has much higher confidence.
When economists think about opportunity cost, they regularly ask themselves three questions:
- How much do I value this?
- What am I giving up now to have this?
- What am I giving up in the future to have this now?
For example, if you are considering buying a $5 cup of coffee this morning, what other things could you immediately be spending that money on instead? Spending this particular $5 means you cannot use it to put gas in your car, buy a gift for your mother, or go to a matinee with a friend. If you consistently make the choice to spend $5 on coffee every day, there are much larger trade-offs you are giving up in the future. For example, that money could be put toward a vacation or a new vehicle.
Going back to our feature example, choosing the revenue-focused feature over the customer-support one may cause a key customer to churn, or customer success employees to feel overburdened and leave the company. These risks are also important to consider when making strategic business decisions.
In product development, there are also huge benefits to being the first to market given the cost of delay. If you debut a new capability in January, you’re first. In June, you’re keeping up with the crowd. If you wait until December, other solutions have passed you by and you’re left with a puddle of melted ice cream.
“Most of our decision making that involves money is based on immediate or sooner-than-later consumption,” says Andrea Caceres-Santamaria, senior economic education specialist at the St Louis Fed. As Product Managers, our inclinations are no different. It’s appealing to repeatedly prioritize perceived quick wins over meatier initiatives because of the higher near-term pay-off. However, if those choices mean your infrastructure is decaying, your customer success organization is neglected, or you lose your competitive advantage you’ll eventually realize the opportunity cost of that quick win was much higher than you initially thought.
Successful product professionals minimize opportunity cost and choose the highest value investment for their product teams by doing the following:
- Ask “What happens if we DON’T do this feature?”
- Consider how important the timing of a feature launch may be to its success.
- Plan small experiments and embrace failure as a learning opportunity
- If still unsure, consider the cost of delaying the decision further. Choosing to delay also incurs opportunity costs. Sometimes a fast wrong decision is still better than a slow right one.