January 23, 2025
3
MIN READ

How to Calculate Opportunity Cost for Your SMB + Real-Life Examples

Finance

Understand opportunity cost, how to calculate it, and why it matters. Plus, discover how Cledara can complement your financial decision-making toolkit.

by
Stephen Boachie-Mensah

When you choose one option, you forgo the benefits of another. It’s a fundamental concept in modern economics—and every single business decision you make.

With so many make-or-break choices, like deciding whether to fund marketing or invest in product development, you’re overwhelmed by both the risks and the potential benefits of each. Maybe you’ve already made a decision, and now you need to know if it’s the right one.

Opportunity cost quantifies the benefits of the alternative you don’t choose, helping you make data-driven decisions.

Read ahead to learn about opportunity cost, how to calculate it, and how it can help your SMB in the long run. 

What Is Opportunity Cost?

Opportunity cost is what you lose by choosing one business alternative over another. Typically, businesses will use opportunity costs to either predict or retroactively assess the best decision between two choices.

Quantifying the cost of what you don’t choose gives you important information to make better strategic decisions.

For example: 

  • A company choosing to spend $100,000 on new machinery forgoes the opportunity to invest that resource in marketing to increase brand awareness.
  • An organization using premium office space instead of leasing it to tenants forgoes the opportunity to gain potential rental income.
  • A business that chooses to expand into market A rather than market B, forgoes the opportunity of profits and growth that market B could have provided.

It’s the road not taken. But instead of double-guessing if you’re walking the right path, you’ll know what you’re missing out on—or if you’re missing out on anything at all.

Opportunity Cost vs Opportunity Benefit

Two terms you’ll often hear thrown around together are opportunity cost and opportunity benefit. Think of them as different sides of the same coin. While opportunity cost is what you give up, opportunity benefit is what you gain by choosing a particular alternative over the others.

Continuing on our previous examples:

  • A company choosing to spend $100,000 on new machinery is able to ramp up production and make $1,000,000 more profit by the end of the fiscal year.
  • An organization using premium office space increases employee morale and productivity, translating to more revenue.
  • A business choosing to expand into market A instead of market B scoops up 15% of the market share and generates more profit.

All of these outcomes are the opportunity benefit of taking the stated actions. 

Calculating opportunity cost is about comparing the outcomes of decision A and decision B to see which is more favorable. But how, exactly, do you do it?

How to Calculate Opportunity Cost: A Simple Formula

The opportunity cost formula calculates the difference in returns between two decisions: subtract the chosen option's return from the forgone option’s return.

The number you’re left with is your opportunity cost. 

Three outcomes are possible:

  1. The number is positive: Meaning your forgone alternative is more beneficial than your chosen route.
  2. The number is zero: Meaning both choices are equally beneficial.
  3. The number is negative: Meaning you’ve chosen the better option.

For example, let’s say you’ve built a SaaS product that connects tech companies to upcoming talent. Your team has singled out two strategic directions. You can either:

  1. Option A: Invest in creating a new AI-powered predictive analysis feature for your product.
  2. Option B: Expand into a new market and connect advertising companies to talent.

Both seem enticing, so you decide to calculate the returns for both options. For the AI-powered feature, you send out a survey to your 10,000-strong customer base. The results show that 10% of them are already willing to upgrade if the feature comes out. 

That’s 1,000 users in all. With each new upgrade, you estimate an increase of $800 in yearly subscription fees. To find out the annual predicted revenue of your new feature, you multiply $1,000 x $800 to get a return of $800,000.

Not bad. Now let’s see the returns for option two. You start by conducting market research to better understand the advertising recruitment industry. Your data indicates that the industry is growing and that you can acquire 90 new customers in the first year of expanding into the market. Given that each subscription costs $10,000/year, you multiply these two numbers to get a return of $900,000. 

Given the formula for calculating opportunity cost is the return on the forgone alternative minus the return on the chosen option, you get:

Opportunity cost = $800,0000-$900,000= -$100,000

The opportunity cost number is negative, meaning that option B—expanding into the advertising recruitment space—is more beneficial. It yields $100,000 more in returns than creating a new AI feature. You’re not “missing out” or leaving money on the table by choosing to expand.

However, keep in mind that understanding and assessing the returns of each decision isn’t always clear-cut. The costs associated with calculating the returns of each option can be explicit or implicit.

Explicit costs are direct expenses, like salaries or marketing, that impact cash flow. 

Implicit costs, on the other hand, are indirect and intangible. They’re costs incurred by a business for something they already own, but have chosen to use in a specific way. For example, an implicit cost of using office space is not being able to rent it out. 

“When calculating opportunity cost, I evaluate both explicit and implicit factors. Tangibly, I focus on metrics like projected revenue, time-to-market, and resource allocation. Intangibly, I consider long-term brand positioning, customer trust, and potential alignment with broader business goals. It’s not just about choosing the more profitable path, but also the one that supports sustainable growth.”

Vivek Madlani
Philip Portman Founder and CEO at Textdrip

We’ll hear more from Phil in our real-life examples of opportunity cost section.

How Does Calculating Opportunity Cost Help Organizations: Why Should You Care?

Opportunity cost helps identify the best option by quantifying what’s lost by choosing one alternative over another.

Key benefits of calculating opportunity costs include:

  • Better resource allocation: Comparing returns and alternatives, calculating opportunity costs helps companies find where they can deploy their time, money, and team most efficiently.
  • Improve financial analysis: Comparing two investment options side by side helps you find the option with the best returns for your business.
  • Clarity and transparency: By identifying returns and comparing them with opportunity cost, companies can ensure each decision has a clear and transparent rationale based on sound economic principles. 

Beyond this, opportunity cost can play a role in some of the highest-level decisions you can make for your business. Let’s take a look.

Opportunity Cost and Capital Structure

As an owner, every "yes" and “no” carries weight. Each decision you make comes with benefits and consequences. The stakes are high, especially when you’re torn between two choices in your capital structure and, subsequently, company ownership.

This is the mixture of debt and equity your business uses for its operations. Debt is borrowed money you need to repay with interest rates. It’s risky for your business but safeguards your ownership from dilution. 

Equity, on the other hand, is money you get from investors and shareholders for a stake in your business. You don’t need to repay it, but it gives investors ownership and a profit share.

By calculating opportunity cost, you can compare the returns from debt and equity financing and choose the best option when structuring your capital. It’s a big decision, probably one of the most important ones you’ll make for your business—so you’ll need a tool like opportunity cost analysis to lay the returns out and make an informed decision. 

What Are The Limitations of Calculating Opportunity Cost?

As helpful as opportunity cost is for finding the right way forward, it isn’t necessarily a litmus test for all business decisions. It has some limitations:

  • Returns between alternatives are often hard to define, leading to rough estimates.
  • Returns of two options can’t be calculated if they don’t share a common unit of measurement.
  • Opportunity cost calculates benefits but doesn’t measure risks.

While opportunity cost is certainly a helpful tool, it shouldn’t be a stand-alone method for assessing all your choices. Combine it with other options like situation analysis or cost-benefit analysis for the full picture. 

Real-Life Examples of Opportunity Cost from Business Leaders

To better illustrate just how impactful opportunity cost can be for strategic decision-making, we reached out to two business leaders—one of whom we’ve already heard from in this article. 

Phil Portman, Textdrip CEO, shares how opportunity cost calculation helped shine a light on a key business decision:

To find the best alternative, Phil calculated opportunity cost by assessing returns at all levels:

“We projected the revenue increase from partnerships and compared it to the revenue potential from the AI feature over a five-year horizon. In terms of time and resources, the AI feature required significant R&D and engineering time, while partnerships had a shorter turnaround. Then, we looked at risk. While partnerships carried less of it, the AI feature offered a competitive differentiator that could pay off significantly in the long run.”

With a birds-eye view of the return of each choice, Phil and the team decided to move forward with their new AI feature:

“We chose to prioritize developing the AI-based feature, understanding that it would strengthen our position as an innovator in intent-based SMS marketing. The results validated the decision: Positiveintent.AI became a key driver of customer acquisition and retention, far exceeding the initial projections for partnerships. This experience underscored how opportunity cost isn’t just about numbers—it’s about aligning decisions with long-term vision and market positioning.

“A few months ago, we were evaluating whether to focus on building out a new feature for Poper or invest those resources into scaling existing capabilities and improving user engagement.

By analyzing the opportunity cost of both options—developing a new feature versus enhancing our current offerings—we determined that enhancing our existing features would yield higher user retention and conversion rates in the short term, leading to faster growth.

We reallocated resources towards refining those existing features, which ultimately increased customer satisfaction and engagement.

Vivek Madlani
Karan Singh Bhakuni Founder and CEO at Poper

Calculate Opportunity Cost to Make More Informed Decisions

Every business decision you make matters. That’s why it’s important to weigh the alternatives, understand returns, and double down on your most promising options.

However, calculating opportunity cost is just one step in assessing the best financial decisions for your business. From software cost reduction strategies to valuing your early-stage startup with revenue multiples, Cledara is your go-to for all things finance. 

Head to the blog for a range of expert insights, industry reports, and practical solutions to assess and improve your financial outlook.

And if SaaS management is one of the problems you’re trying to solve? We can help with that, too.

Contents

Contents

The software management solution for finance teams.

Learn more

Subscribe to our newsletter

Receive the latest insights in your inbox

Stephen Boachie-Mensah

Stephen is Cledara’s in-house Finance Manager who thrives in businesses with fast-paced growth. Stephen’s role is to provide insights to the wider business, he has been heavily involved in cross-functional projects stretching across the introduction of global benefits, financial modelling and KPI reporting procedures. Outside of work, football and American football are his favourite pastimes.

Share this post

Subscribe to our newsletter and stay informed on the latest SaaS insights

Explore more

Explore more

What Is Annual Revenue? The Founder’s Guide to Financial Literacy

In this article, we break down annual revenue, what it is, why it matters, and how to calculate it, to help you assess your company's financial health with confidence.
Read more

The 12 Best FP&A Tools for 2025

Interested in learning how to enhance your FP&A strategy with the right software tools? This guide is here to help.
Read more

Planning, Budgeting, and Forecasting: How CFOs Can Set, Strategize, and Forecast the Future

Master the differences between planning, budgeting and forecasting, and discover how they drive financial success.
Read more

How to Outsource a CPA for Your Startup: 5 Key Criteria

Outsourcing your accounting to a CPA can save time and resources—here’s how to find the best fit for your startup.
Read more

Win Customers in Competitive Markets with Penetration Pricing

Penetration pricing is a powerful strategy to attract customers and dominate new markets by launching products at competitive, low prices—learn how it works and why it could be your next big move.
Read more

The What, Why, and How of Unit Economics

Is your business truly profitable at the unit level? In this post, we’ll unpack how unit economics provides the insights you need to make smarter financial decisions and drive sustainable growth.
Read more

CFO Dashboard: What it is and Why You Need One

Spreadsheets can only take you so far—discover how a CFO dashboard can transform the way you manage financial metrics, automate tasks, and optimize decision-making.
Read more

Everything You Need to Know About Accrued Expenses

Accrued expenses might sound complex, but they’re simply the costs your business has incurred but hasn’t yet paid—understanding them is key to accurate financial reporting.
Read more

A Guide to Virtual Debit Cards: All You Need to Know

If your business is tired of dealing with the hassle and risks of physical cards, virtual debit cards offer a secure, efficient solution for managing spending online and in-person.
Read more

Revenue Multiples: The Pros, the Cons, and How to Calculate Yours

Discover revenue multiples as a key valuation method for early-stage companies, what they are, their pros and cons, how to calculate them, and the factors that impact their effectiveness in startup valuation and funding.
Read more

How to Identify and Prevent Expense Reimbursement Fraud

We explore the various types of expense reimbursement fraud, their potential cost to organizations, and provide practical strategies for identifying and preventing such fraudulent activities in the workplace.
Read more

How to Become a CFO in Tech: An Analysis of 100+ Careers

A comprehensive analysis that examines the career paths of over 100 CFOs in the technology sector, providing valuable insights into education, experience, and skills required to reach this pivotal leadership role in today's fast-paced tech industry.
Read more

A Thorough Guide to Automated Invoice Processing

Automated invoice processing can revolutionize your business's financial operations by streamlining workflows, reducing errors, and saving valuable time and resources.
Read more

14 Smart Strategies to Reduce Software Costs as a CFO

Software is typically a company’s second biggest expense after payroll, so here are 14 actionable ways to get your spending under control
Read more

Venture Debt: Raising Funds for Your Early Stage Startup

A financing option for startups and small businesses that allows them to access funds without diluting equity, providing a valuable tool for growth, cash flow management, and runway extension.
Read more