Opportunity Cost for Authors

Opportunity Cost is a concept used a lot in Finance and Business. It’s not used much in Books & Publishing, although it should

It is an incredibly important concept. One you can use both for your career as an Author, and for your personal life

What is Opportunity Cost

Opportunity Cost is the cost of choosing one alternative over another

1. It’s the benefits you lose out on when you choose Option X, instead of choosing Option Y
2. Because it is hard to identify all the costs of choosing Option X over Option Y, Opportunity Costs are often overlooked
3. Opportunity Cost requires sacrifices. Choosing Option X over Option Y involves some sacrifices (lost benefits)
   1. In hindsight, you might realize that it would be better to choose Option Y. That you sacrificed certain benefits in return for what you got by choosing Option X
   2. What you sacrificed (versus what you actually got) is your Opportunity Cost

In simplest terms, let’s say you bought Microsoft stock and your $10,000 investment increased in value to $30,000. However, if you had bought Apple, that $10,000 would have increased to $40,000 ($10,000 more than choosing Microsoft). That means your opportunity cost is $10,000

In real life, a much more intricate analysis is required as Opportunity Cost is rarely as simple as ‘buying Apple instead of Microsoft stock would have given me $10,000 more in earnings’

What is also worth pointing out, is that in Business and in your Career, the Opportunity Costs can sometimes be very high

1. Choosing Option X might lead to your career failing
2. Choosing Option Y instead might have led to you becoming a bestselling author
3. Therefore, Opportunity Cost is an incredibly important thing to understand

Choosing the wrong option can sometimes have an immense Opportunity Cost

Opportunity Cost Definitions – Better Understanding Opportunity Cost

Here are some definitions for Opportunity Cost, if you want to dive in deeper

1. Investopedia defines Opportunity Cost as ‘the benefits an individual, investor or business misses out on, when choosing one alternative over another’
   1. It points out that understanding the potential missed opportunities is critical and allows you to make better decisions
2. Wikipedia defines Opportunity Cost as the cost of the next best alternative to a product or service
   1. Example: The opportunity cost of the time one puts into their own business is the salary that could be earned in other occupations
3. WallStreetMojo has a nice equation that helps understand Opportunity Cost
   1. They also have an interesting example of a mobile service operator that extended its 3 month free data plan by a further 3 months

Opportunity Cost helps you better understand the costs and benefits of the decisions you make

What does Opportunity Cost mean for Authors and Publishers

Authors and Publishers have to make decisions all the time. Opportunity Cost will help you understand what the ramifications of these decisions might be

Unfortunately, most authors make decisions based on 1 or more of

1. What other authors are doing
   1. Not a good choice as there is no guarantee other authors are making the right choice
2. What is the ‘easy’ option
   1. Again, not a good choice as ‘easy’ is usually not the best
3. What is the best decision in the short term
   1. Often the worst decision in the long term
4. Peer Pressure or Crowd Intelligence
   1. The crowds are not intelligent
   2. Your peers (unless they are very financially successful authors) are not necessarily the best judge of what will work
5. Traps set up by companies based on Fear and Greed
   1. Some companies will trap authors by promising ‘Easy Success’
   2. Some companies will trap authors using various Fears (Fear of Missing Out, Fear of Failure, etc)

Instead, we would politely recommend making decisions based on concepts such as Blue Ocean Strategy, Opportunity Cost, What Gets Measured Gets Managed, and other business principles. Concepts built and developed over decades (in some cases, centuries)

It is much better to use strategy from eternal texts such as The Art of War, Chanakya Niti, The Prince, and The Book of Five Rings, than to ask your friends Tom, Dick, and Harry what they think will work

Opportunity Cost is one of the most powerful ways to learn from your mistakes. It is also one of the best ways to make decisions

An Example of Opportunity Cost for Authors

Let’s consider an author who had to choose between Literary Romance and Shifter Romance. As she did not do proper research, and gave a lot of weight to her slight preference for writing in Literary Romance, we had the following

1.  Literary Romance Chosen Path
   1. The Author chose Literary Romance as she preferred it slightly, and as she was not aware it was a much smaller market than Shifter Romance
   2. As she is a good writer, she was able to become one of the Top 200 Literary Romance authors
   3. Unfortunately, as Literary Romance is a very small category, her earnings are only $1,000 a month (after accounting for expenses such as book creation and marketing)
   4. A carry on effect is that she has to stick with her day job. Between her day job and her earnings from Literary Romance, she makes quite a comfortable living
   5. She is very happy about writing Literary Romance. She also really likes that, on occasion, she will break into the Top 100 Literary Romance authors and/or into the Top 100 Bestselling Books in Literary Romance
2.  Shifter Romance (the Path not taken)
   1. If the author had chosen Shifter Romance, things would have been different. There is obviously some amount of projection and guesswork here – however, it is a reasonable estimate
   2. In Shifter Romance, she would be able to become one of the Top 400 Shifter Romance authors
   3. As Shifter Romance is a very big category, and as her writing skill level is high, she would be able to earn $4,000 a month (after accounting for expenses such as book creation and marketing)
   4. One big impact of making that amount is that she would switch to writing full time, and give up her day job
      1. The additional time would allow her to write more and increase her chances of keeping and growing her level of success
   5. She would be only somewhat happy about writing Shifter Romance. She would think wistfully about perhaps switching one day to being a Literary Romance author
3. Opportunity Cost
   1. Let’s look at what the opportunity costs of choosing Literary Romance over Shifter Romance are
   2. She has a higher rank in Literary Romance, so choosing Literary Romance is a benefit in terms of sales rank and author rank
   3. By choosing Literary Romance over Shifter Romance, she has lost $3,000 a month in earnings
   4. By choosing Literary Romance over Shifter Romance, she has foregone the ability to be a full time writer
   5. She is happier writing in Literary Romance. She is also getting more ‘validation’ in the form of hitting the Bestseller List and Best Author List (something that might not happen in Shifter Romance)

This is, in some ways, an excellent example

1. There are some very big advantages of choosing Literary Romance over Shifter Romance
   1. The author is a higher ranked author in Literary Romance than she would be in Shifter Romance
   2. Her books are also doing better in terms of bestseller lists within the category
   3. Perhaps most importantly, she is happier writing Literary Romance
2. There are also some very big Opportunity Costs
   1. She is giving up $3,000 a month in earnings
      1. To Be more precise – she is earning only $1,000 a month writing Literary Romance. Whereas, in Shifter Romance she would be earning $4,000 a month
   2. She is giving up the opportunity to become a full time writer
      1. Shifter Romance gives her that option
      2. Literary Romance does not

The whole point of Opportunity cost is ->  It will help you Fully Understand What You Are Giving Up, and What You Are Getting, when you make any Important Decision in your Life or Career

Another Example of Opportunity Cost for Authors

A large store offers a mobile phone company some special marketing benefits, in return for giving the store exclusivity (the mobile phone company will not sell its phones anywhere else)

1. Path of choosing Exclusivity with the Store
   1. Due to special marketing benefits, phone sales go up from $1 Million in the store (expected) to $2 Million in the store (actual). An increase of 100%
      1. This is offset, somewhat, by $400,000 of expected revenue outside the store, which is now zero due to exclusivity
   2. Due to exclusivity, reach outside the store goes to zero
   3. In the short term, revenues go up by $600,000
   4. In the long term, as more and more mobile phone companies give the store exclusivity, the marketing benefits become essentially weak and almost useless. Sales fall back to $1.1 Million in the store
      1. Sales in the store stabilize at $1.1 Million a year
      2. Company stays exclusive to the store
         1. As it has forsaken the external market, it is now scared of giving up the special marketing benefits that it gets with exclusivity
   5. As the mobile phone company is now exclusive to the store, it has lost its customer base outside of the store
      1. So now it has the disadvantage that it has become very dependent on the store
2. Path of not choosing Exclusivity with the Store
   1. Without special marketing benefits, phone sales are $1 Million (as expected)
      1. Sales from outside the store are a further $400,000
      2. In the first year, it basically loses $600,000 if it does not give exclusivity to the store
   2. It is free to do marketing and build a customer base outside the store
   3. In the short term, revenues are $600,000 less than what would be expected
   4. In the long term, as it makes efforts both in the store and outside the store, it sees the following changes
      1. Due to special marketing benefits given to mobile phone companies that are exclusive to the store (benefits which our mobile phone company is not getting), it is not able to increase its earnings in the store. Earnings remain at $1 million a year
      2. Due to focused efforts outside the store, and lesser competition (as lots of mobile phone companies are giving exclusivity to the store), it is able to grow revenues outside the store to $700,000 a year
      3. Total sales stabilize at $1 Million in the store, and $700,000 outside the store
      4. A total of $1.7 million a year
   5.  As the mobile phone company is not exclusive, it has maintained its customer base outside the store
      1. It has the advantage of not being dependent on the store
      2. It does, however, have the disadvantage that within the store it has no special marketing benefits and has to fight much harder for that $1 million in revenue from the store
3. Opportunity Cost
   1. By being exclusive to the store, the mobile phone company gains
      1. $600,000 additional revenue in Year 1
      2. Perhaps $300,000 of additional revenue in Year 2
      3. We assume that by Year 3 revenues are slightly more from being non exclusive
         1. This is a critical takeaway – it is only in the first 2 years that giving exclusivity to the store benefits the mobile phone company
      4. It is easier for it to market within the store, as it keeps getting special benefits in return for exclusivity
         1. The store remains the largest retail outlet for mobile phone companies, so this is a significant benefit
      5. Basically, it gets $900,000 more in revenues in Years 1 and 2. It also has an easier life as marketing and sales is much easier
         1. Another ‘ease of life’ aspect is that it is selling only in one store and that also makes life easier
   2. By being exclusive to the store, the mobile phone company loses
      1. Year 4 the company would have made around $300,000 more by not being exclusive
      2. Year 5 onwards the company would have made around $600,000 more each year by not being exclusive
      3. Independence. The company is extremely reliant on the store, and the store can dictate terms to the mobile phone company
      4. The market outside the store
         1. In the long term this is a big loss because no single store or company can dominate a market for more than a decade or two
      5. Basically, in the long term (Year 5 onwards), the company is losing $600,000 each year by being exclusive to the store
   3. Opportunity Cost is what you make of it
      1. The mobile phone company has to decide whether it is worth it to give exclusivity to the store
      2. Interestingly, there is no right or wrong
      3. It is up to you to decide whether the opportunity cost is something you think is very valuable, or not valuable at all

What should stand out in the above example, is that most companies would never ever go for exclusivity if they knew

1. That year 4 onwards they would start losing money
2. That year 5 onwards they would be losing $600,000 a year every single year
3. That they would be completely at the mercy of the store, as they would have lost the market outside the store

However, most companies would fall for the Greed of making $600,000 more in the first year

In fact, from the perspective of the large store

1. Appealing to the Greed of the mobile phone companies, and their fear
2. The inability of mobile phone companies to factor in Opportunity Cost (and see what would happen in 5 years)
3. Is exactly what helps them get exclusivity
4. This allows the large store to cut off supply to its competitor stores
5. This also allows the large store to gain an incredible amount of power over the mobile phone companies which decide to give it exclusivity

This is a tactic used very often by technology companies. It’s called Tragedy of the Commons. If you are deciding whether to make a deal with a technology company, always factor in the opportunity cost

Opportunity Cost as it pertains to Deciding What to Write

Perhaps the most important point at which authors should consider Opportunity Cost, is when deciding What to Write

Purely because it is the Single Most Important Decision You Will Ever Make as an Author

It is imperative that you weigh the Opportunity Costs and Benefits BEFORE you make the decision

1. Some book categories are just not financially viable
   1. The opportunity cost of choosing such a category is that you are giving up the option of making a living from writing books
   2. We would very strongly recommend that you never choose such a category
2. Some book categories are so competitive that your chances of success are remarkably low
   1. The opportunity cost of choosing such a category is that you might never get a fair chance at success
   2. People might never find you, because of the sheer number of options
   3. We strongly recommend only picking such a category if you have a very stable day job
3. Some book categories are perfect (good market demand, low competition), and yet will not appeal to you
   1. The opportunity cost of choosing such a category is that even after succeeding (hopefully you do), you will remain unfulfilled
   2. Do consider that after you start making a good amount of money from writing books, you can always devote a small portion of your time to writing in a category which you feel is ‘fulfilling’
   3. The one warning we will mention is that a book category might seem ‘fulfilling’ in theory and in practice might not be fulfilling at all
      1. Making money and getting read are often the two biggest feelings of ‘fulfillment’ you can get
4. A few book categories will be your dream book categories (good market demand, match your skills, you are passionate about them, low or moderate competition)
   1. The opportunity cost here is close to zero
   2. This is what you should search for
5. A few book categories will be Blue Oceans where you create your own market
   1. The opportunity cost of choosing such a category is that there is a very low chance of creating your own market. Perhaps just 5% (in reality, perhaps 1%)
   2. If you succeed, you will be wildly successful
   3. However, the 95% to 99% probability is that you will not succeed
      1. In that case you will be left with nothing – if you fail to create the market, then there is no market. No sales. No earnings

The Biggest Decision you will make is ‘Choosing What to Write’

Please do consider the benefits and the opportunity costs of your decision, before finalizing the decision

Opportunity Cost and the 3 Core Skills for Authors

We talk a lot about the 3 Core Skills for Authors

Basically, there are 3 Core Skills which all authors must learn

1. Knowing What to Write i.e. Choosing the right market to write for
2. Writing Very Well
3. Marketing Very Well

To be successful, an author must do one of the following

1. Become world class in 1 of the 3, and passably good in 1 of the remaining 2
2. Become very good in 2 of the 3
3. Become ‘just good enough’ in all 3

When deciding what path to choose, to be successful, you have to consider the Opportunity Cost of focusing on one skill over the others

1. If you focus exclusively on Knowing What to Write, you will become very good at finding great markets
   1. However, if you ignore Writing Very Well, you will not have books good enough to take advantage
   2. Additionally, if you ignore Marketing Very Well, you will not be able to market and sell well
2. If you focus exclusively on Writing Very Well, you will have beautifully written books
   1. However, if you don’t work on Knowing What to Write, you will write for the wrong markets where no readers exist
   2. Additionally, if you don’t work on Marketing Very Well, even if you find a good market, you won’t know how to get your beautifully written book in front of readers
3.  If you focus exclusively on Marketing Very Well, you will know how to sell anything
   1. However, if you can’t find a Market, you will have no one to sell to
   2. Furthermore, even if you find a good market, your efforts will be wasted if your product is not good

As you can see, it is a delicate balancing act

You have to decide which 1 or 2 of the 3 Core Skills you want to focus on. At the same time, you have to make sure you have the other Core Skills strong enough to take advantage of your main 1 or 2 Core Skills

Opportunity Cost & Life Changing Decisions – Choosing 1 or more of Knowing What to Write, Writing Very Well, and Marketing Very Well

Perhaps the 2nd most important decision you will make (after deciding What to Write), will be deciding which of the 3 Core Skills for Authors you will focus on

It is a 2-part Decision made of two equally critical parts

The first part of the decision is – What number of Core Skills will you focus on?

1. Are you going to focus on just 1 Core Skill and work on becoming world class at it
   1. The obvious risk is that if you fail to become world class, then you are left with no chance of success
2. Are you going to focus on 2 Core Skills and work on becoming very, very good at those 2 skills
   1. This is a much safer option
   2. It is also our preferred option
   3. However, you do have to become very, very good at two separate skills
      1. Becoming very, very good at even 1 is difficult
      2. Becoming very, very good at 2 is exceptionally difficult
3. Are you going to focus on all 3 Core Skills and work on ‘becoming good enough’ at all 3 skills
   1. This is an option which needs a lot of time and balance
   2. This is also a relatively safe option
   3. It has one added benefit, which the other two options do not
      1. After you have become good enough at all 3 skills
      2. You can, depending on the opportunities you are presented with, narrow down to just 1 or 2 skills and focus on becoming very, very good on those
      3. Basically, you can adjust based on what the market is demanding

The second part of the decision is – Which Core Skills in particular will you focus on?

1. Which 1 or 2 or 3 of the 3 Core Skills are you going to focus on?
2. Knowing What to Write is the most coveted skill
   1. If you can do proper market research and develop the skill and intuition to find good markets, you will always make money
   2. If you can add another Core Skill to this most important Core Skill, then you will find big financial success
3. Writing Very Well is the romantic choice
   1. What author doesn’t want to be a ‘beautifully talented and skilled writer’
   2. It is also very tempting because unlike the other Core Skills, becoming a very, very good writer is 100% under your control
   3. The big danger with focusing on Writing Very Well is that
      1. The Market Always Wins – no matter how good your writing, you will not sell your book unless you find a good market
      2. Marketing is Just As Important as Product AND It Has to Happen FIRST
         1. If you don’t know Marketing you will not be able to get your writing in the hands of readers
         2. It will not matter how beautiful your writing is
         3. As Marketing has to come first, Marketing Very Well is, in some ways, more important than Writing Very Well
4. Marketing Very Well is the toughest skill to master
   1. It is also incredibly essential
      1. Even the most perfect market is an enigma if you don’t know how to market and sell to those readers
      2. Even the most beautifully written book is lost if you can’t get it into the hands of the right readers
   2. The downsides with focusing on Marketing Very Well are
      1. Good marketers detach themselves from the reality that the Product must also be very good
      2. If you don’t find The Right Market, even masterful marketing is pointless

As you can clearly see, this second decision, of choosing what Core Skills for Authors to focus on, is an incredibly difficult one

We have no easy solutions. You have to do a lot of thinking, consider the benefits and the opportunity costs of choosing each, and make a decision

Opportunity Cost and Your Time

Before you make all these critically important decisions

1. What to Write
2. How Many Core Skills to Focus on
3. What Core Skills to Focus On

It is rather important to make one incredibly important decision

Is Writing Books the right choice for you?

1. Is Writing Books what will make you happiest?
2. Is Writing Books the best use of your time?
3. Is Writing Books the profession/hobby that is most likely to bring you success
4. What is the Opportunity Cost of writing books, over your other options?
5. Is your Day Job really that bad?
6. Would you be better off writing books as a Hobby?
7. Do you have the Skills to be successful as an Author?
8. Do you already know one or two of the 3 Core Skills for Authors?
9. Will you just be taking hard earned money from your day job and funneling it into a rather expensive hobby?
10. Who is really benefiting? Is it you or is it the ecosystem? Is it you or is it the store? Is it you or is it people selling you services?

The vast majority of people jumping into writing books are making the decision without considering the Opportunity Cost of choosing to write books

We are all free to do whatever we want to do with our time and our money. Whatever makes us happy. Whatever makes us successful. Please don’t lose sight of that