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.


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


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


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
Regulatory Risk Jonathan Poland

Regulatory Risk

Regulatory risk refers to the risk that a company will face regulatory actions or penalties as a result of non-compliance…

Knowledge Work Jonathan Poland

Knowledge Work

Knowledge work refers to work that involves the creation, use, or application of knowledge and expertise. It is characterized by…

Cognitive Abilities Jonathan Poland

Cognitive Abilities

Cognitive abilities refer to the mental processes that allow individuals to acquire, retain, and use knowledge. They are foundational types…

A/B Testing Jonathan Poland

A/B Testing

A/B testing, also known as split testing or experimentation, is a statistical method used to compare two versions of a…

Operating Costs Jonathan Poland

Operating Costs

Operating costs are the expenses that a company incurs in order to generate revenues from its business operations. These costs…

Professionalism Jonathan Poland


Professionalism is the practice of following the standards and expectations of one’s profession, organization, and role. It involves upholding the…

What is Integrity? Jonathan Poland

What is Integrity?

Integrity is a concept that refers to the adherence to moral and ethical principles, as well as the consistency between…

Competitor Analysis Jonathan Poland

Competitor Analysis

Competitor analysis is the process of gathering and analyzing information about competitors in a market in order to understand their…

Variable Pricing Jonathan Poland

Variable Pricing

Variable pricing is a pricing strategy in which prices are set based on real-time data and can vary depending on…

Content Database

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

Phased Implementation Jonathan Poland

Phased Implementation

Phased implementation is a method of developing and introducing a business, brand, product, service, process, capability, or system by dividing…

Security Controls Jonathan Poland

Security Controls

IT security controls are measures that are implemented in order to reduce security risks. These controls may be identified through…

The Lobbying Process 150 150 Jonathan Poland

The Lobbying Process

Lobbying the government involves a series of steps to effectively communicate your message, build relationships with decision-makers, and influence public…

Personal Selling Jonathan Poland

Personal Selling

Personal selling is a type of sales approach that involves face-to-face interaction with potential customers. Unlike other forms of sales,…

Cash Flow Statement Jonathan Poland

Cash Flow Statement

The cash flow statement is a financial statement that shows the inflows and outflows of cash for a company over…

Pull Strategy Jonathan Poland

Pull Strategy

A pull strategy is a marketing approach in which a company creates demand for its product or service by promoting…

SWOT Analysis 101 Jonathan Poland

SWOT Analysis 101

SWOT analysis is a tool that is used to evaluate the strengths, weaknesses, opportunities, and threats of a business or…

Storytelling Jonathan Poland


Storytelling is the act of using narrative to communicate information in an engaging and memorable way. Businesses can use storytelling…

Restructuring Jonathan Poland


Restructuring is the process of reorganizing or reshaping an organization in order to improve its efficiency, effectiveness, or competitiveness. It…