#104: Understanding Opportunity Cost
Yesterday, I talked about breaking up with a bad customer because they were costing us time, money and energy, paying us terrible margins and messing us around on our receivables. Any one of those would be a valid reason to break up with a customer, but I also want you to think about another factor: Opportunity Cost.
The phrase "Opportunity Cost" might take you right back to your econ class in college, but hang with me here. I promise I won't start talking about guns and butter. (Fun fact: Macro Econ is the only class in my entire life where I got a C.) Opportunity cost is defined as the loss of potential gain from other alternatives when one alternative is chosen. Basically, it means that by choosing Option A, you are giving up the potential profit from Option B.
It's a great way of thinking about working with certain customers. We're all limited in our resources—whether that's time, money, energy or uranium. We have to decide how we are spending those resources, and if you are expending any of your time, money, energy or uranium on one customer, that means that you can't spend those things on another customer. So you better make sure that the customer who is getting your attention and radioactive materials is the one that's going to make you the most money.
We often hang onto bad customers because we think any revenue is better than no revenue, but that's a false choice. Getting rid of difficult, low-margin, high-need, slow-paying customers will create a temporary vacuum in our resources, which we can then fill with a GOOD customer, who will pay us more, be less work, and require us to mine less uranium. It's a classic win-win.
So, if you are struggling to fire a bad customer, remind yourself of that econ class and ask what the opportunity cost is of hanging on to them.