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Sunday, November 7, 2010

Opportunity Cost and How to Measure It

Last week I talked about the importance of having a daily nut, or daily goal. In addition to helping you make your annual income goal, your daily nut can help you decide whether to say "yes" to a potential assignment, and to bid on work as well.

But in addition to the money you'll make, the estimated time you'll spend on the assignment, and the value of the assignment to your business, don't forget to think about your "opportunity cost" when you take on work.

What is opportunity cost? Simply put, it’s any work will you be unable to do because you’ve taken on that particular assigment. And typically, the bigger or more complex the assignment, the greater the opportunity cost. (And the tighter the deadline, the higher the cost--because you'll be busting your butt to make that deadline during that time.)

For example, in the last two weeks, I've signed two new ghostwriting clients, both with aggressive deadlines. That's awesome news for my business and bank account, but it also means that I'll have to turn down any other big projects (even lucrative ones) in the meantime. I know how much work I can handle (and remember, I have two kiddos I'm responsible for wrangling as well), and I'm stretched enough already.

But even smaller assignments can carry a sizeable opportunity cost as well. When I started freelancing, I used to write articles for my local newspaper. The pieces paid between $35 and $125, and usually required a trip out of the office to attend an event or interview a source in person. It wasn't long before I realized that I needed to eliminate the paper as a client.

It wasn't a difficult decision. First, the pay wasn’t much, yet the stories usually tooks at least several hours' to write because of in-person interviews. The real problem, though, was that the time I spent researching and writing the stories prevented me from pitching more lucrative markets (like national magazines) which would result in better-paying work. That opportunity cost was hurting me in the short- and long-term.

The end of the year is a good time to consider the opportunity cost of your regular clients. Is the amount of money you make from them worth the hassles, time, or potential loss of other, more lucrative work? Only you can determine what the opportunity cost of a particular assignment or client is--and whether that assignment or client is worth it. Ideally it always is.