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Evaluating Cost Effectiveness of Digital Strategies: About The Cost Benefit Method

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Evaluating Cost Effectiveness of Digital Strategies: About The Cost Benefit Method

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Evaluating Cost Effectiveness of Digital Strategies: About The Cost Benefit Method

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Evaluating Cost Effectiveness Of Digital Strategies

The cost benefit evaluation method and the cost effectiveness evaluation method are two different tools that businesses
may choose to use to help make business decisions. Both methods involve comparing the future or impending purchase of
new equipment or programs based on their cost and their expected benefits to the company, but one may be more suitable
for certain circumstances than the other. For instance, a company may find it best to use a cost effectiveness evaluation to
narrow down a list of new equipment choices or programs, and a cost benefit method to analyze whether to adopt the final
choice or choices.

About the Cost Benefit Method


Companies use the cost benefit method to help make financial decisions, particularly those that involve the purchase of
new equipment. The cost benefit method involves placing factors in two columns on paper. In the first column, the
company lists all of the financial benefits the new equipment or software will provide. Such benefits might include
improved productivity, lower supply costs and increased business. In the second column, the company lists the concrete
and peripheral costs of the new equipment or software. This includes the basic cost of the equipment, any business lost
during the transition to the new equipment, training costs, the cost of changing suppliers, and the like. Administrators,
managers or executives look for options whereby the financial benefits outweigh the costs.

Cons of the Cost Benefit Method


The cost benefit method uses hard numbers to inform decisions, and some of these numbers can be misleading at first
glance. When using the cost benefit method, you must be aware of all of the intangible benefits that may come from the
business decision. For example, a switch to new software may allow the company to attract a larger pool of qualified
employees, or a particular advertising strategy may weigh better with customers and improve customer loyalty. The large
cost of a decision may quickly overshadow many of the intangible benefits if they are not accurately calculated.

About Cost Effectiveness Evaluation


A cost effectiveness evaluation is more complex than the cost benefit method because it involves more components. This
method may be favored before the cost benefit method to narrow down a list of potential programs or new equipment to
purchase. Rather than looking solely at the monetary value of the change, this method looks at the broader effects of the
program. For example, a company may evaluate which employees will receive the greatest benefits from a specific
training program and whether the costs of that training program will still be beneficial if certain employees leave the
company.

Cons of Cost Effectiveness Evaluation


Because the cost effectiveness evaluation method does not always take into account all of the costs of a new program or
equipment, it may fail to consider items such as the cost of training new employees or other additional costs that will
accompany the program and equipment . Often this method takes into account only individuals currently involved in the
business or program and does not account for newcomers who will need to be trained or what will happen if key
individuals leave the business, taking specific skills sets with them.

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