The math may be hard, but the concept is easy (and so important)! Plus 5 bad investments authors love to make.
What is opportunity cost? You might hear this word thrown around in a business sense from time to time. Opportunity cost is the idea that if you invest in one thing, you sacrifice your opportunity to invest in something else.
Your investment could be time or money. If I invest my time this afternoon baking a cake then I sacrifice the opportunity to make muffins. When we talk about opportunity cost we’re simply comparing, in hindsight, the best possible profit outcome of all investments you could have made to the investment that you actually made.
For an overly simplified example that will drive your brother-in-law the business nerd crazy, let’s pretend my mission is to buy $1,000 of stock in a soft drink company. I choose to invest in Pepsi (because it’s just better), and over three months my stock increases in value by 3% and I make $30. However, Coca Cola stock increased in value by 4% over the same time period. So if I had invested my $1,000 in Coke, I would have made $40. If I had chosen the best option instead (Coke), I would have made $10 more. My opportunity cost is therefore $10.
From an opportunity cost perspective, it cost me $10 to invest in Pepsi rather than Coke. It’s sort of like I lost $10.
This is all very simple with an example like this. Real life is scarcely ever so simple. Calculating opportunity cost is also complex in that we have to make an “all other things being equal” assumption. For instance, if I had invested in Coke instead of Pepsi, would that have influenced the market and changed the way the stocks performed? (Perhaps not with a $1,000, but what if I had invested $10M?)
Opportunity cost is extremely important to large businesses. It allows them to quantify their relative success and failure in the marketplace.
How does it apply to authors?
In real-life business, the math is complex. But the concept is very simple, and it’s a concept that every author must take to heart.
You only have so many hours in a day. You only have so much money to invest in yourself. When you choose to invest in something, you are depriving yourself of the opportunity to do something else.
The big issue for authors is that typically the things we like to do have an extremely high opportunity cost when compared to the things we ought to do.
For instance, authors love to have book release parties. They’ll spend hundreds of dollars and many hours organizing an event which, while fun, usually results in zero new books sold. (Almost all of the books bought at an event like this are bought by people, close friends and family, who would have bought the book anyway.) If you have time and money to burn, that’s no problem. But most authors don’t. That time and money would have been better spent in a myriad of ways.
Even if you could pull off a great release event for free, the opportunity cost is still high. There are so many less fun ways to spend your time that would result in far higher book sales.
The problem with opportunity cost is that it is a necessarily cynical and greedy approach to decision making. Did it really “cost” me $10 to invest in Pepsi? Of course not, I actually made $30! I should be thrilled. It’s sort of a glass is half-empty approach.
But that’s sometimes the perspective that we need to adopt. This is what profitable businesses do every day.
Authors, with our tremendous imaginations, are often prone to sunny thinking. We’re romantics, many of us, so it’s so easy to rationalize doing what we like the best. “Doesn’t anybody care about my happiness?”
But if we’re going to be successful in the business of publishing, we have to be good business people. We have to be shrewd, analytical, and always be actively improving.
Five bad investments authors love to make
Here are five examples of things that I often see authors focus on with high opportunity costs:
- Book signings
- Release events
- Book-related merchandise
- Press releases
- Book Trailer Videos
This is not an exhaustive list, but you may be noticing a theme. Many of these are things that may make the author feel like “a big deal.” But they simply don’t convert. They don’t make sales. They don’t make lifelong fans.
That’s not to say that they don’t ever convert. I’m sure there are some success stories. And things like book trailers and merchandise, for instance, can be very effective for already-famous authors. But for most emerging authors, these activities have a high opportunity cost. They don’t work, and they take time and money away from things that do work.
Social media belongs on this list for most authors. Social media can be a good investment, but 90% of authors investing there are not doing it in a way that actually converts to book sales, and it therefore carries high opportunity cost.
So for the math-disinclined aspiring writer, what is opportunity cost? It’s forcing yourself to ask a hard question, is this the best use of my time and money right now? Does this investment lead to the highest conversion (sales/signups/etc) I can get?
You may not be inclined to sit back and run the calculations (and the opportunity cost of calculating the specific opportunity cost may be quite high 😊), but you can carry this idea with you. How does this investment compare to the results I could achieve with the best investment I can make?
Ideally, we spend 100% of our time and money making the best investments. That’s how you win.
Want to make good investments? I want to help you. My “Arche Year” course is now available from the Kingdom Writers Guild, an online community of box-breaking Christian writers. This 25-class course will teach you to lay a firm foundation for your author’s marketing platform and to effectively grow your audience. You can get full access to the complete course for just $10/month. Check it out here: KingdomWritersGuild.org/arche-year
I help authors kick butt at business and reach large audiences with the messages God has put on their hearts.
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