Shopify blog
As a business owner, you work with limited resources, so every decision comes with a trade-off: choosing option A means you’re passing on option B. Opportunity cost is the value of the next-best option you give up when you choose one path over another.
Understanding opportunity cost helps you weigh trade-offs before you commit, so you can put your resources toward the option that delivers more value for your business.
This guide covers how opportunity cost works and walks through a few real-world examples you can apply to your own decision-making process.
Table of contents
What is opportunity cost?
Opportunity cost represents the value of what you forgo by choosing one option over an alternative. Trade-offs like this often exist in a business context because resources (e.g., time, money, staff) are limited, so choosing one option always means giving something else up.
For example, if you spend company profits upgrading office equipment instead of hiring a new employee, the opportunity cost is the value you’d have gained from that hire.
Explicit vs. implicit costs
Opportunity costs come in the form of explicit and implicit costs.
- Explicit costs. These are out-of-pocket expenses your business incurs when producing goods or services, such as overheads—like the wages you pay employees, and rent payments for your office space.
- Implicit costs. These arise from resources you already own that could have been put to use in some other way. The most important implicit cost is time—any time you spend doing one thing is time you can’t spend doing something else.
Opportunity cost differs from sunk costs, which is money and time you’ve already spent on something—like developing a new product—that you can never get back. Since those resources are already spent, sunk costs should not be factored into your decision-making about choosing one option over another.
How to calculate opportunity cost
The basic formula looks like this:
Opportunity cost = Return on best forgone option − Return on chosen option
To calculate it for your own business:
- List your options. Write down the choice you’re considering and the next-best alternative you’d give up.
- Estimate the return for each option. Use projected revenue, savings, or another measurable value.
- Subtract the return of your chosen option from the return of the option you didn’t pick.
- Review the result. A positive number means the option you gave up may have been more valuable, while a negative number supports your choice.
4 opportunity cost examples
- Renting a manufacturing plant
- Choosing whether or not to introduce a product line
- Picking a shipping option
- Deciding whether or not to offer discounts
Here are four opportunity cost examples to help you understand how the concept works.
1. Renting a manufacturing plant
A growing ecommerce business is choosing between two manufacturing plants to house its products:
- Plant A. Rents for $10,000 per month and is close to the business’s other operations.
- Plant B. Rents for $6,000 per month, is the same size as Plant A, but sits 20 miles away.
Using the formula from above, the explicit opportunity cost of choosing Plant A comes out to $10,000 − $6,000 = $4,000 per month, the amount the business gives up by not choosing the cheaper option.
But that’s only the explicit cost. The implicit cost includes the time employees would spend commuting to Plant B. To find the total opportunity cost, the business has to weigh the specific commuting time against the $4,000 monthly savings, then decide whether Plant B is worth it once every cost is factored in.
Rent gaps like this aren’t unusual. Manufacturing space in the US averaged $9.55 per square foot in the first quarter of 2025, but rates vary widely by market.
Canyon Coffee ran into a similar space trade-off when deciding how much room to commit to as the business grew.
They wanted to build a large, scalable facility where they could continue to roast their own beans as the business and demand grew. “We didn’t want to make what we viewed as a mistake we saw other coffee companies make,” says Casey Wojtalewicz, cofounder at Canyon Coffee. “We saw people building roasting facilities in retail spaces with retail rent.”
While it can be nice for customers to see the roasting process in action, it’s not necessarily cost effective. Instead, he assessed the cost of renting a space large enough to accommodate their roasting volume, versus putting that money towards building their own factory.
2. Choosing whether or not to introduce a product line
A company is deciding whether to spend $150,000 to introduce a new product it isn’t sure will sell:
- Sunk cost: $10,000. Already spent on product development. It can’t be recovered, so it’s left out of the opportunity cost calculation.
- Chosen option: Introduce the product. Requires the full $150,000, with no guaranteed return until the product sells enough to break even.
- Forgone option: Invest the $150,000 elsewhere. The 10-year Treasury yield stood at 4.63% as of August 13, 2026, according to the Federal Reserve Bank of St. Louis. Investing $150,000 at that rate would generate about $6,945 per year.
Using the formula from above, the opportunity cost of introducing the product is:
Opportunity cost = Return on best forgone option − Return on chosen option
Opportunity cost = $6,945 (Treasury return) − Return on new product
If the product’s return ends up below $6,945 for the year, the company would have come out ahead investing the money instead. Anything above that figure makes introducing the product the better choice.
Fly By Jing faced a version of this trade-off after a new product line took off faster than expected.
“We had a line of frozen dumplings at one point and it worked really well,” says Founder Jing Gao. “We’re selling so many frozen dumplings, but we realized that it was diverting attention away from our core which was our sauces and our sauces are shelf stable. They have much better margin structure than something that’s frozen."
3. Picking a shipping option
An ecommerce business is deciding between two ways to get products to customers:
- Ship in-house. No new cash cost, but the business owner spends their own time and energy managing shipping logistics.
- Outsource to a third-party logistics (3PL) provider. Costs about $50,000 per year, which is the explicit cost of the decision. In exchange, the business owner frees up the time they’d otherwise spend on shipping.
Here, the “return” isn’t purely cash on either side. The first option (shipping in-house) saves $50,000 in cash, but costs the owner their time. Whereas the second option (outsourcing) costs $50,000, but returns that time back, freeing the owner to work on things like developing new products, which could open up new revenue streams. Weighing the two means comparing the $50,000 explicit cost against what that reclaimed time could realistically be worth to the business.
For some businesses, keeping fulfillment in-house is part of the product itself.
“We don’t have a 3PL,” says Aaron Harvey, creative director at Flamingo Estate. “We pick and pack our own orders in a warehouse. We have tens of thousands of square feet of warehouse space and there are employees that are handwriting notes and tying ribbons. This is what we do. This is our business.”
Store owners debating these options can also use the Shopify Fulfillment Network app to connect with 3PL partners who store inventory and fulfill orders and manage the whole process from the Shopify admin.
4. Deciding whether or not to offer discounts
A business notices a slowdown in sales of an important product, with $20,000 of it left in inventory. It’s weighing two options:
- Hold the inventory. Keep paying $5,000 a year in carrying costs (e.g., interest on financing, warehouse rent, and insurance) while waiting for regular-price sales.
- Discount the product 15%. Clear the remaining stock, but give up an estimated $3,000 in revenue compared to selling at full price.
Using the formula from above, the opportunity cost of holding onto the inventory instead of discounting it is:
Opportunity cost = $5,000 (carrying costs avoided by discounting) − $3,000 (revenue given up by discounting) = $2,000
Discounting comes out $2,000 ahead.
That $5,000 carrying cost is worth checking against a benchmark. Across 6,468 companies in APQC’s inventory carrying cost benchmark, the median runs about 10% of inventory value. On $20,000 of stock, that’s closer to $2,000 a year. A business paying $5,000 is carrying costs well above the median, which makes clearing the inventory more of a priority.
Store owners can track these numbers directly: profit reports show gross margin by product, and the inventory management page in the Shopify admin helps track stock levels and carrying costs over time.
Discounting also carries a cost beyond this one decision. In Iterable’s 2026 Customer Engagement Report, 67% of US and UK consumers surveyed said they delay purchases to wait for a larger discount. Discount too often, and customers may learn to wait for the next one rather than buy at full price.
Opportunity cost FAQ
Can opportunity cost impact pricing decisions in ecommerce?
Yes, opportunity cost can apply to ecommerce pricing decisions. If you offer a discount on a product, for example, you might gain more customer loyalty or clear space for new inventory. But it means you would lose something in the process—namely the potential revenue if that product had been sold at the original price.
Why is opportunity cost important?
Opportunity cost matters because it forces a comparison between what you’re choosing and what you’re giving up, not just whether the choice itself looks good. A decision that seems reasonable on its own can still cost more than the next best alternative would have delivered. Weighing opportunity cost in advance helps you direct resources toward the option most likely to pay off.
Is opportunity cost relevant to both small and large ecommerce businesses?
Yes, opportunity cost is relevant to businesses of all sizes. Small businesses, in particular, usually have less capital and more limited resources, so calculating opportunity cost is especially important for making informed decisions.
Can opportunity cost be avoided in decision-making?
Businesses don’t have to calculate the opportunity cost for every decision. However, because you’ll always forgo an option when pursuing another, it’s wise to consider the value of what you’re giving up.
How do you calculate opportunity cost?
At a basic level, calculating opportunity cost is a matter of finding the cost of each choice, then subtracting the cost of the chosen outcome from the cost of the alternative:
Opportunity cost = cost of alternative outcome - cost of chosen outcome
Businesses will sometimes use more complicated financial modeling to figure out the opportunity cost of different financial decisions.
