Starting a new business is always a risky decision that requires a thorough analysis of all the potential pros and cons. While the idea of being a successful self-employed entrepreneur is appealing to many, it is a challenging process with statistically low chances of success. It is a well-known factoid that sixty percent of startups collapse in their second year, and ninety percent fail within ten years of operation (Gajewski & Rzemieniak, 2018). Opportunity cost is an economic term representing the potential revenue loss when choosing one alternative over the other (Fernando, 2021). Since it precludes forgoing a stable job with guaranteed income and benefits, it is necessary to calculate the opportunity cost of becoming an entrepreneur.
According to the provided scenario, I made 50,000 USD per year plus benefits equal to thirty percent of my salary at a previous job. On January 1st of the New Year, I started my own business and made 45,000 USD during the first year, and out of that, I paid 6,000 USD for health insurance. Considering that health insurance is an employee benefit, it could be considered that I received 15,000 USD in benefits such as medical and dental insurance at my previous job — 30 percent of my yearly wages — and earned 6,000 USD in benefits as an entrepreneur. Therefore, the opportunity cost of starting my own business was 11,000 USD in annual wages and 9,000 USD in non-wage compensation. I lost out on 22 percent of my straight income, which is a relatively steep opportunity cost but expectable during the first year of business. However, an annual loss of 22 percent is not sustainable, and it is necessary to lower my opportunity cost in the future years.
The logical way to lower my opportunity cost is to increase profitability by maintaining my current business model and pursuing cost-effective methods to attract more customers. Social media marketing offers the opportunity to establish credibility, build a relationship with potential customers, and achieve a competitive advantage without requiring exorbitant expenditures. Sites such as Twitter, Facebook, and Instagram drive sales from new and existing customers, stimulate impulse purchases and provide information on customers’ attitudes and interests (Vinerean, 2017). Furthermore, digital advertising automatically assesses its effectiveness and cost-per-click, so the parameters can be adjusted immediately if they are not translating to purchases. Social media marketing is the most optimal method since it offers enormous opportunities, and I do not have the resources to increase revenue by expanding my product line or geographic locations.
I would identify my brand philosophy and build a marketing strategy around my target audience’s demographic background, preferences, and habits to increase profitability. Fifty-four percent of consumer decision-making and eventual purchases are affected by social media interaction since customers develop a strong affinity for a particular brand through online communication (Vinerean, 2017). I would run a campaign to establish brand awareness by partnering with local influencers with high follower engagement rates and posting relatable and entertaining content on various social media platforms.
In conclusion, losing out on employee salary and benefits is an unavoidable condition of becoming an independent entrepreneur. In the provided scenario, the opportunity cost of starting my own business amounted to 11,000 USD in wages and 9,000 USD in benefits. While this is an acceptable number for the first year, it is not a sustainable figure for the future. To lower opportunity costs and increase profitability, I believe the most optimal solution is to utilize social media marketing because it is the most powerful and cost-effective method of attracting new customers.
References
Fernando, J. (2021). Opportunity cost. Investopedia. Web.
Gajewski, P., & Rzemieniak, M. (2018). Startups-Factors Determining the Achievement of a Scalable Business Model [Conference presentation]. MakeLearn and TIIM Internation Conference, Naples, Italy. Web.
Vinerean, S. (2017). Importance of strategic social media marketing. Expert Journal of Marketing 5(1), 28-35. Web.