With the cost of components used to build doors and windows seemingly rising every day, every purchasing agent, production manager and general manager I know is on the lookout for every possible way that he or she can cut costs out of their doors and windows.
Therefore, if you have a product or component to sell that can help improve the efficiency of production, perhaps by lending itself to automation, then this inflationary and tariff-ridden environment may suddenly work in your favor.
Moreover, if you have a component that can help save cost in the fabrication process while also improving the marketability of your customers’ doors and windows, then you would be remiss to focus only upon the cost savings on the manufacturing end. You should also bring up the opportunity on the marketing or sales side of the business to make sure that the ROI of the complete picture is being considered.
Many companies use the concept of Opportunity Cost to evaluate projects competing for available use of company resources. So, what exactly is Opportunity Cost? Opportunity Cost, in economics, is the potential benefit an individual, investor, or business misses out on when choosing one alternative over another. It represents the value of the next best alternative that is forgone. So, if you are not selling the incumbent product or component currently being used, then it is your job to convince your prospective customer exactly what his or her company is missing out on by not using your product. Now, if your component, whether it is a type of glass, vinyl extrusion, spacer, inert gas, thermal break, or hardware component, imparts unique features and benefits to the end user, then perhaps you can translate this to a missing revenue stream that could be realized if your potential customer were to switch, the Opportunity Benefit. But how do you quantify this number in terms of sales dollars? This is not always easy to do, and your prospect may not appreciate a wild guess. So this is where market research comes in handy, which is something you might entertain by reading my last blog, Marketing Research: Money Well Spent.
For example, what if your prospective customer is considering your warm-edge spacer system that lends itself to automation and in the process cuts out multiple steps in the fabrication process, reduces manpower, and ultimately reduces the cost per unit of his windows. However, the price tag on the automated machine is $1.75 MM. Then he has some homework to do. In his strategic analysis, your prospective customer calculates the ROI of switching to the new warm-edge spacer and automated machine to be 8%. This is “Plan A.” He must then weigh this return against the potential return he could get by investing that $1.75 MM in the stock market or some other promising investment, which is called “Plan B.”
If Plan A has a return in year one of 8% and Plan B has a return in year one of 10%, then the Opportunity Cost equals the return on the option not chosen. The return of the option chosen is 2% if he does not choose Plan B. So, what if you almost have him convinced to go with Plan A, but his CFO is leaning towards that alternative investment (Plan B) because he or she is concerned about the 2% that will be forgone?
Enter the concept of Opportunity Benefit! On the flip side of the coin, Opportunity Benefit refers to the profit or advantage gained from selecting one option over others. While Opportunity Cost focuses on what’s forfeited by not selecting the best alternative, Opportunity Benefit highlights the positive result or value obtained from choosing a specific course of action. Although it’s not as widely used as Opportunity Cost, it plays a role in evaluating Opportunity Costs.
So, to analyze the Opportunity Benefit, you have him go to his sales team and put together a list of new accounts they can confidently land if the performance of their window improves. With the new spacer system and automated production method, his engineering department provides a report showing better (lower) U-values, better (higher) condensation resistance ratings and a better warranty (20 years versus 10 years), the latter due to less concerns about workmanship. His vice president (VP) of sales then comes back with a list of new accounts that, with a high confidence level, he can grab. This extra business will raise revenue and improve profit margins due to a higher average selling price. The VP of sales then calculates the Opportunity Benefit of Choosing Plan A to be 5% ROI.
So, now your prospective customer has some ammo to go back to his CFO with and present a case that Plan A is the best decision due to the Opportunity Benefit outweighing the Opportunity cost by 5-2=3%.
Remember that these principles of Opportunity Cost and Opportunity Benefit are not included in accounting profit or reflected in external financial reporting, but they are invaluable tools in the decision-making process.
So, remember, the Opportunity Benefit must never be overlooked!