Tuesday, March 26, 2019

Opportunity Cost

Had a few people ask about marketing concepts such as pricing, product development and such so thought I would write some posts on the topic starting with the concept of opportunity cost.

Opportunity cost is the idea that whenever you buy something, either with money or some other means of exchange, you give up something. Generally whenever we make a decision, we have several options from which to choose. When we choose one option, we forgo the benefits we might have gained by choosing a different option. Let's see how this works through Magic cards

A Magic player comes into the store with $22, enough to make a $20 purchase plus tax. The customer comes in looking for a Nicol Bolas, The Ravager, which currently sells for $20 or for booster packs, which sell for $3.99 each. The customer now has the choice of either purchasing the Nicol Bolas, The Ravager card or 5 booster packs of Magic and must weigh the advantages and disadvantages of each choice. They can take the sure thing and purchase the card they want but forego the other 74 cards they could get by purchasing the booster packs, or they can purchase the booster packs and forgo the Nicol Bolas. Whichever one they do not choose is the opportunity cost they have foregone in order to make the other decision.

There are also non-monetary opportunity costs as well. You can choose to spend time cleaning the house or playing D&D with your friends.. If you choose D&D, you get to have fun with friends but put off the housecleaning until later, possibly getting someone mad at you if you had promised to do it. If you choose housecleaning, you get a clean house and avoid getting someone mad at you, but miss seeing your friends and have to listen enviously as they tell you later how much fun they had.

A third form of opportunity cost is delayed or immediate gratification. If I have $10, do I spend it on a set of dice now (immediate gratification) or save it  and apply it towards a larger purchase later, such as a copy of Gloomhaven (delayed gratification). In all of these cases, we want to make the chose that minimizes the forgone opportunity cost, which we generally do by minimizing the cognitive dissonance we feel about many decisions, a topic I will discuss in the next post.

No comments:

Post a Comment