Opportunity Cost in Software Development: What It Is and How It Works

May 29, 2023

Mile Zivkovic

Opportunity cost is a common term in business and investment management. But how does it work in software development? We answer all of your questions here.

Imagine coming to a fancy restaurant and ordering a dish off the menu. As you patiently wait for your food to arrive, you start glancing at the staff and the dishes they are bringing to the other people in the restaurant and you start wondering… Did I really make the right choice?

This is a classic example of opportunity cost at play. And while ordering a bland dish might not be so horrible, making the wrong choices in product development can have tragic consequences.

Today, we’re going to explain everything you need to know about opportunity cost and how it works in software development.

What is opportunity cost?

Opportunity cost is a common term in economics and business that denotes the benefits you are potentially missing out on when you choose one alternative over the other. In our example above, that would mean ordering filet mignon and missing out on the lobster, which happens to be the specialty of that restaurant.

opportunity cost graph

In business, that means choosing to invest time and money in option A and missing out on the benefits of option B. For example, deciding to invest in a mobile app instead of building a marketplace for your product.

As Investopedia states, this is a formula for calculating opportunity cost:

Opportunity Cost=FO−CO

Here, FO is the return on the best forgone (missed out) option and CO is your chosen option. In short, opportunity cost is the money, time or some other currency you would lose by choosing one option over another.

Opportunity cost in software development

As any SaaS leader knows, there are plenty of opportunity costs when working with a product. When you go for one option, you automatically forfeit all the benefits of the other possibility. For example, deciding to use Python instead of Java may complicate your hiring efforts because finding an amazing Python developer is difficult.

factors for building costs in software development

There are countless decisions to make and different paths to choose when delivering a product. Here are multiple types of opportunity costs in developing software.

The opportunity cost of time and money

It takes an average of six to nine months to develop a software product that is medium in complexity. Whether you create an app or a web application, you should be prepared for a significant time commitment and allocate sufficient resources accordingly. That’s not just a lot of time, but also a lot of resources to spend on development, design, QA, marketing and everything else it takes to successfully launch a product.

It gets even bleaker when you find out that 90% of startups fail within their first year. So by the time you finish developing, it could already be too late and your money (or your investors’) is gone down the drain.

Deciding to build one type of product, to focus on one target audience, to build one set of core features - these are all opportunity costs concerning time and money in software development. And out of all the possible choices you have to make, this one is the hardest: deciding what type of product to build and whose pain points to solve.

The opportunity cost of building the right features

Say that your startup is one of the lucky 10% that made it through their first year and your core product is successful. People love it and you’re getting feature requests to build add-ons to your existing offer. However, there are countless feature requests (and some of them are very good) and only so much time and money to build them.

In other words, you have to prioritize. This is where opportunity cost comes in.

Assume you can build feature A and feature B in the same time frame. Feature A brings you new users but does not contribute anything to your existing user base. Feature B is a massive upgrade for your existing customers but will be hard to sell to a new target audience.

The opportunity cost here will differ based on various factors, such as the urgency of building a feature, your feature backlog, the available resources, and more. There are various feature prioritization frameworks that you can use to make your decision easier. However, listening to your customers is always the number one choice if you want to build features in a smart way.

The opportunity cost of building software in-house or buying it off the shelf

Most SaaS leaders want full control of their product and code. To achieve this, you want to build every feature and functionality in-house. But as we’ve explained before, this can cost massive amounts of money as developers are anything but cheap.

On the other hand, you could outsource the work and buy an off-the-shelf product that embeds in your own. It’s cheaper, faster, and easier to implement, but you run the risk of not having access to all the code and you can’t have the developers handy at all times like you would with those in-house.

Out of all the opportunity cost situations, this is probably the easiest one to work out. When using off-the-shelf software such as Luzmo, you actually save money, time and resources and you get a finished product that works with any SaaS app. In most cases, it makes more sense to buy rather than build.

Compare the cost of hiring a team of app developers (each costing around $95k per year) and getting off-the-shelf software for a few hundred dollars a month. The math is pretty simple.

You can use the time and resources you saved to build more core features.

How to solve the opportunity cost in software development

The simplest way to solve this problem is to prioritize your product features ruthlessly. Whenever you face a situation with a fork in the road, think of what makes the most impact on your bottom line.

And in most cases, it boils down to choosing the fastest and most efficient way to build something. At Luzmo, we can help you solve at least one opportunity cost problem - and develop your embedded analytics dashboard for your product. 

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