Resourcefulness in Starting a Business – Part 1: Understanding Opportunity Cost

YSN is lucky to have an audience of motivated, ambitious, career-minded people – many of whom are young and have long amazing professional lives ahead of them.  A lot of these go-getters are entrepreneurial in spirit and will one day, if not already, own their own business.  Earlier this year I founded my own company, Earbits.com, which will be launching in a few weeks.  I want to share some of my experiences about how to get the most out of the resources you have.  We are building a world class marketing platform and have gotten incredibly far on very little money.  This is the first in a short series on how to be resourceful in starting a business.

Understanding Opportunity Cost

One of the most important lessons I ever learned in business is understanding opportunity cost.  In the early stages of a business, you usually have a small team of people, hopefully with different and complementary skills.   Knowing how to task these people is paramount to your success.

Hopefully, you’ve picked a business with a lot of different ways to make money, ways to get customers, ways to minimize expenses, etc.  Your job as owner of the company is to look at all of the possibilities and opportunities available to your company and decide which ones are the most important, and whom to give each of these jobs.  The same goes for managing a department, if you are not the business owner but are in charge of a team.

In a previous company I started, we had a significant amount of administrative work that needed to be done to update the content on our website.  We had little money in the bank for hiring anybody and it seemed hard to justify hiring someone to do something that my partner and I could do ourselves.  Why pay someone $10 per hour for 100 hours of work, when I can do the work myself for free?  But, when you consider the other opportunities and tasks that we could be doing, such as sales calls, you start to look at the math differently.

If I can make 15 calls per hour and get one sale every 45 calls, that’s one sale every 3 hours.  If a sale to my company is worth $230, every hour I spend on the phone earns us about $77.  So, while hiring someone to make site updates costs us $10 per hour, doing it myself is actually costing us $77 in missed revenue!  In that case, paying someone $10 an hour to free myself up for sales calls is by far the best decision, even if the money you have is limited.

The same thing goes for analyzing not just who should do a particular task, but which task a person should do if there is only time for one.  Take another sales example: If calling one type of client usually results in one sale every 45 calls, but another type of prospect closes once every 35 calls, the 2nd seems like a better use of time – unless of course, the value of the first sale is $230 and the value of the 2nd is only $120.  You have to understand these issues and make the best decision every time.

The same types of decisions go for which partnerships to accept, which to prioritize with your development team, and more.  Let’s say you have three deals on the table, one is for a big client and pays $21,000, but would require your development team working on nothing else for 6 weeks.  At the same time, you have 2 smaller deals that pay about $8,000 each and only require 2 weeks of work total.  Perhaps the best thing to do is to knock out these two smaller deals first, and then move on to the bigger task.  It’s hard to pass on bigger deals, but you have to make the very best decisions about how to use your resources.

Understanding the metrics surrounding your various opportunities and making the absolute best use of your team is crucial to every business.  As the leader of your team or company, your job is to look at these opportunities and make the right decisions.  One great way to get help with that is to have strong advisors – people who have done what you’re doing or something similar before, and asking them for guidance.  There is no reason to do everything yourself, particularly if you can speed things up by asking for help.

Next time, we’ll talk about how to get advisors, and much more.  Talk to you soon

Joey Flores is CEO of Earbits.com – an online streaming radio and music marketing platform.