Cost Effectiveness

Cost Effectiveness

Cost Effectiveness Jonathan Poland

Cost effectiveness is the measure of the relationship between the costs and outcomes of a program, project, or intervention. It is a key consideration in decision-making, as it helps organizations determine whether the resources invested in a particular activity are justified by the benefits or outcomes that are achieved.

There are several ways to measure cost effectiveness, including:

  1. Cost-benefit analysis: This is a method of evaluating the costs and benefits of a program or project by comparing the total costs to the total benefits. It is often used to compare alternative courses of action and to determine the most cost-effective option.
  2. Cost-utility analysis: This is a method of evaluating the costs and benefits of a program or project by comparing the costs per unit of benefit. It is often used to compare alternatives that produce different types of outcomes, such as health interventions that produce different levels of quality of life.
  3. Cost-effectiveness analysis: This is a method of evaluating the costs and benefits of a program or project by comparing the costs per unit of outcome. It is often used to compare alternatives that produce similar outcomes, such as different treatments for the same medical condition.

By considering cost effectiveness, organizations can make informed decisions about how to allocate resources and ensure that they are achieving the greatest possible value for money. The following are some illustrative examples.

Calculation

The benefit here is usually non-financial as techniques such as cost-benefit analysis or return on investment are used for a purely financial analysis. Cost effectiveness is calculated as the ratio of cost to benefit.

ex. cost effectiveness = cost / benefit

Health

A program to fight infectious disease in a developing country costs $3 million per year and is estimated to save 4400 lives.

ex. cost per life saved = (3,000,000/4400) = $681.82

Air Quality

It might be possible to translate this into health benefits such as increased life expectancy for millions of people with enough data. A program to improve air quality in a city improves average atmospheric particulate matter from 110 PM2.5 to 100 PM2.5. The program costs $40 million dollars.

ex. cost per PM2.5 improvement = 40,000,000 / (110 – 100) = $4 million per PM2.5 improvement

Transport

Transportation strategies can be compared with cost effectiveness metrics such as cost per mile. This may include costs such as energy, the value of people’s time, environmental impact and the cost of capital such as trains and roads. For example, a bicycle that costs $200 and can be used for 1500 miles.

ex. cost per mile = ($200 / 1500) = $0.13 / mile

If you include the cost of people’s time at $40 an hour and the assumption a bicycle can travel 13 miles an hour in traffic.

ex. cost per mile = $0.13 + ($40/13) = $3.93 / mile

Bicycles generally don’t cause much environmental damage so this cost is close to zero. Cost per mile can be used to compare bicycles to other forms of transport including all costs related to capital, land, infrastructure, operations, energy, environmental impact, people’s time and quality of life.

Learn More
Call To Action Jonathan Poland

Call To Action

A call to action (CTA) is a phrase or statement that is used to encourage a specific response or action…

Product Features Jonathan Poland

Product Features

A product feature is a characteristic or aspect of a product that contributes to its overall functionality and performance. Product…

Product Identity Jonathan Poland

Product Identity

Product identity refers to the overall personality or character of a product. This can include the product’s features, benefits, and…

Servant Leadership Jonathan Poland

Servant Leadership

Servant leadership is a leadership style in which the leader puts the needs of the team or organization above their…

Implementation Jonathan Poland

Implementation

Implementation is the process of putting a plan or idea into action. In a business context, implementation refers to the…

Advertising Jonathan Poland

Advertising

Advertising is a form of marketing that involves the use of paid media to promote a product, service, or idea…

Tribes Jonathan Poland

Tribes

Tribes are groups of people who self-organize around common interests, values, communities, professions, needs, or aspirations. The concept of tribes…

Market Penetration Jonathan Poland

Market Penetration

Market penetration refers to the process of increasing the market share of a company’s existing products or services within a…

What is FMCG? Jonathan Poland

What is FMCG?

Fast moving consumer goods (FMCG) are products that are sold quickly and at a relatively low cost. These products are…

Content Database

Search over 1,000 posts on topics across
business, finance, and capital markets.

Mission Statement Jonathan Poland

Mission Statement

A mission statement is a statement of purpose that defines the goals and values of an organization. It is a…

Travel Expenses Jonathan Poland

Travel Expenses

Travel expenses refer to the costs associated with traveling for business purposes. This can include expenses such as airfare, hotel…

Examples of Transparency Jonathan Poland

Examples of Transparency

Transparency refers to the practice of openly and honestly disclosing information to stakeholders within an organization, such as the public,…

What is a Focus Group? Jonathan Poland

What is a Focus Group?

A focus group is a research method in which a small, diverse group of people are brought together to discuss…

Procurement Jonathan Poland

Procurement

Procurement is the process of acquiring goods or services from external vendors or suppliers. It is an essential part of…

Prospecting Jonathan Poland

Prospecting

Sales prospecting is the process of identifying and researching potential customers for a business’s products or services. This typically involves…

Everyday Low Price Jonathan Poland

Everyday Low Price

Everyday low price, commonly abbreviated as EDLP, is a pricing strategy in which a retailer offers its products at a…

Information Security Risk Jonathan Poland

Information Security Risk

Information security risk refers to the potential for unauthorized access, disruption, modification, or destruction of information. This can have serious…

Psychographics Jonathan Poland

Psychographics

Psychographics is the study of personality, values, attitudes, interests, and lifestyles. It is a research method used to identify and…