I was purchasing T-Shirts for a team celebration recently and was intrigued to find that female T-shirts cost $10 or 25% more than a male T-shirt at $8. The reason I was given by our vendor (something about volumes usually purchased) wasn’t convincing . I realized I was seeing the “Pink Tax” in action.
I recently came across a fascinating 2015 paper by the New York City Department of Consumer Affairs about the cost of being a female consumer. In the 397 retail products compared, women paid more 42% of the time while men only did so 18% of the time.
For example, girls’ toys cost more 55% of the time versus 8% of the time for boys. Girl’s clothing costs more 26% of the time versus 7% for boys. Women’s personal care products cost more 56% of the time versus 13% for men. And so on. This is nuts.
These costs add up over time and have powerful implications on women’s ability to save for retirement – to the tune of a million dollars over the course of a lifetime. Thanks to taxes, a penny saved is worth a lot more than a penny earned.
So, while it is great to see all the efforts going into achieving pay gap equality, we’ll need to pay as much attention to the pink tax. Improving the top line without paying attention to the bottom line is the definition of counter productive.
Let’s take a situation where a firm decides to buy a smaller technology firm for $1 Billion.
Every decision that is made is typically the result of a cost-benefit analysis. In some cases, this analysis is entirely quantitative. In others, it has a huge qualitative element (e.g. fit with strategy). Either way, the costs of the acquisition are not just the cost of acquiring the company. Those are just the financial costs.
The costs that should matter to us are the economic costs of the acquisition – driven by the opportunity cost of using that capital. In this case, the acquiring company had 3 options on how to spend the billion dollars related to that acquisition (there are options beyond this – we’ll assume the acquisition was critical) –
- Build the technology
- Partner with the technology company to get access to it
- Acquire it
When we take these options and their opportunity costs into consideration, the only way we get to option 3 is if we believe that it is the best use of the 1 Billion dollars. Or, put differently, had we invested the billion dollars into options 1 or 2, the long term results would be sub-optimal.
Understanding opportunity costs is fundamental in life just as it is business. At any given time, saying “yes” to a decision just because it provides us some benefit is a really bad way to make decisions. The way to make such decisions is to ask – “Is this the best possible use of my time given all my priorities?”
Great strategy requires us to make choices after understanding trade-offs. And, having a good decision making process that considers opportunity costs is an integral part of great strategy.