The Opportunity Cost

The Technicians on the Technibble forums brought up a very interesting topic about the “opportunity cost” of the things we do.

A good example of explaining “opportunity cost” is if a person invests $10,000 in the stock market, they deny themselves the interest that could have accrued by leaving the $10,000 in a bank account instead. The opportunity cost of the decision to invest in the stock market is the value of the interest they could have earned if they put it in the bank.

So how does this apply to Computer Technicians? Someone on the Technibble forums mentioned the idea of pre-making lengths of RJ-45 network cable and packaging them individually (such as 1m, 5m, 10m lengths). The margin would be fairly high on the products because when you buy network cable and the plugs in bulk, they work out to be fairly cheap and you can charge more for a pre-packaged cable.

One of the Technicians on the forums chimed in with this:

Once you tack in your opportunity costs (Your time not spent doing other things) and what your time is worth making your own cables for lengths shorter than 6′ is a waste of time.

Lets say that you sell network cables at $1 per foot. It takes you a minute on each end of get the wires in the right order and crimp the plug on them so that works out to 2 minutes per cable. If you sold twenty 5-foot cables for $100 and our material costs was $28 then you would have made an easy $72 for 40 minutes of work.

However, if you had purchased these pre-made cables at the same material cost of $28, you would have had these cables already in you inventory and earned $66 of your normal $100 per hour rate while you used that time to repair a clients computer.

Total cost of making them yourself:
$100 income – $28 expenses = $72 profit (at a loss of 40 minutes of time)

Total cost of purchasing the cables:
$100 income – $28 expenses = $72 profit
$72 profit +$66 you earned having used your time and skills for repair work instead = $138 profit

In this situation, the opportunity cost of making cables is the loss of $66 you could have earned if you used your diagnostic and troubleshooting skills for fix computers instead.
The figures change a bit when you are making a small amount of very long cables because then it might be worth it. A few technicians recommended Monoprice.com as one of the cheapest places to get network cables (I haven’t used it, but a few forum members have). In this example, if you were to purchase those twenty 5-foot cables from Monoprice, the total cost would have been $13.60 for the cables and about $6.60 shipping equalling $20.20 in total.
Is 40 minutes of your time worth $20.20? Probably not.

I understand that many people will make cables if they have no other work to do, but that time could be used far more effectively by reading a marketing book or doing something else to improve your business – which will in turn bring you more income.

There comes a point in the life of your business when your time and skills are too valuable. Of course, a lot of people just do it for the love of the work, and thats fine too if that is what makes them happy. I must admit I do this myself in certain areas, we just need to be aware that there is an opportunity cost in the decisions we make.

Special thanks to everyone in this thread for bringing up the topic.