If you were trying to explain the types of business to an elementary school student, a good place to start would be to group businesses according those that sell things, and those that do things. In business, as complicated as people try to make it – and they love to make it complicated – it usually is that simple. The same can be said for explaining profit. Despite the endless hours that CPAs, IRS agents, venture capitalists, investors, and CFOs spend on their spreadsheets, you can explain profit to little Jimmy by simply explaining that you have to get more for what you sell than you. You can use a bag of marbles to illustrate this point in about 90 seconds.
In a service-based agency that is mostly labor, trying to figure out how much you put in can be difficult. In these businesses there are very few hard costs (rent, utilities) and 85% of the operating expense is labor. A general rule of thumb when billing out a specific consultant, is that you need to be billing out between 50% to 400% more than you pay. Both are seemingly great markups compared to the margins you get from selling widgets. This is why we’ve seen such an influx of small consulting and professional services emerge over the last few years. An individual professional who is able to bill their time for 2x what they are making in the corporate world can work half the time for the same money. It seems too good to be true.
Yet, for many, they still struggle. They can’t quite pinpoint it, but at the end of the year when they count their bag of marbles, they come to the stark realization that while they do have a few more marbles, they had to work 80 hours a week all year to get them, and since no one has successfully found a way to create time, that is probably all the marbles they will ever get. At this point, many of them do two things:
First, they quit looking at Zillow for a tropical island paradise. Secondly, they realize that they have to get away from trading time for money. Many boldly proclaim that, starting today, their company is no longer going to do anything by the hour. They then start searching for products, recurring revenue, SAAS, and Bitcoin to fill the gap.
This is wrong, or at least partially wrong. As a business owner, you have to learn to recognize a key nuance in the bartering of time, talent, and money.
You, the owner, should be focused solely on trading your talent for money. This is the same for anyone in an executive, ownership, or even senior position. Once you reach a certain point in your career, you are selling yourself massively short by trading your time for money. It’s not about selling products or widgets (although these are representations of your talent). It’s about making sure that you are selling all the skills you have for what they are. If that ends up coming out to $1500/hr, so be it. You should always be selling on value, not a clock, and if the company on the other end is getting that level of value, then it’s a fair price, regardless of what it works out to be hourly.
The goal is to avoid trading your time for money, instead of your employees’ time. Remember, it is perfectly okay to trade your employees’ time for money. In fact, this is primarily how all service-based organizations (and many product companies) actually work. As you hire great employees, you will begin to trade both their time and their talent for money and that is where the growth really happens. However, there is no need to avoid selling their time.
It personally took me some time to learn this difference, and admittedly it took me a couple more years than it should have to switch to talent billing. Having now made the switch to selling my talent and my team’s time, I can honestly say that not only is GCS more profitable, but my customers are getting better overall value and my quality of life is substantially improved.