Punishing efficiency

Reading time: 2 – 4 minutes

Years ago, I practically lived in a little restaurant.  I ran my first, rather small, consulting business from a table in there and spent a lot of time observing and learning about the food service industry.  I recall one young guy — call him Scott — who was hired as kitchen staff.  There was a set list of tasks to be done every evening for closing the restaurant, some of which could be done while there were still a few customers present.

On his first night, Scott finished all the closing tasks in record time — the place closed at 11:00 and he was completely done by 9:00.  Being a hard worker, the manager found more work for him to do.  And more work, and more work.  By the end of the week Scott had been properly trained.  The closing tasks consumed his entire evening work and Scott was finished them at precisely 11:30.

The paradox

It is a paradox of economics that we tend to reward inefficiency and punish efficiency in our employees.  Think about it for a second.  If you assign eight hours worth of work to an employee and they finish it in one hour, will you

  1. Give them the other seven hours off with pay or
  2. Find more work for them to do?

Now think about this.  If you assign one hour’s worth of work to an employee and it takes them eight hours to do it, will you

  1. Dock them seven hours pay (and get sued) or
  2. Pay them for the time and write it off to either your optimism or their learning?

The problem

To be fair, the problem stems from the fact that it is very difficult for we employers to actually estimate how long a particular task or set of work will take.  By demanding a known quantity from our employees — hours worked — we think we can use the law of averages in our favor.  We also operate under the somewhat delusional idea that by rewarding with more responsibilities and increased pay we will motivate people to keep giving up the only asset humans really value — time.

However, I have news for you.

  1. If you employ fewer than about a hundred people, the law of averages is not going to work.  You don’t have enough data points.
  2. By definition the law of averages means you are settling for average productivity.
  3. We’ve entered a world where more and more people are beginning the understand that true wealth is defined by the way you spend your time, not by how many dead presidents you have stuffed in a mattress.

The most disturbing piece of news is that employees learn.  If you punish efficiency for a few weeks, they will learn to never be efficient.

Now, it’s your turn…

No, I don’t have an easy answer for this particular dilemma, maybe you the reader can suggest some solutions.  Drop a comment if you have an idea.

Until next time…

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How much billable time do you really have?

Reading time: 2 – 4 minutes

Summary

Your transition from employee to entrepreneur is loaded with traps.  One of the biggest is that you will charge too little for your time and not be able to be profitable.  In this article, you will learn some tricks to ensuring you are valuing your billable time correctly.

If you are starting out in the consulting or other practitioner field, one of the things you must do is estimate (aka, budget) your available billable time.  And when you budget your billable time, it pays to remember that it will be far less than you think. Not slightly less…far less.

Some back of the envelope arithmetic

We begin with 260 working days in a year.

Subtract out:

  • 1.5 days per week marketing and business development
  • 0.5 days per week administration (tax compliance, government compliance, financial management, etc.)
  • Four weeks per year, vacation and holidays

So far we have removed 127 days from your billable time.

From the remainder:

  • 10% for “rework” or “freebies” and other non-billable client activities.
  • 10% for shooting the breeze (come on, you know you will, so budget it!)

So what do you really have to work with?

When you do the above math you are left with roughly 110 billable days per year with which to make your business work.

Please don’t think “I’ll work six or seven days a week or 10 hours a day” because you already will without budgeting for them.  Simply accept the reality that you have far less of yourself to sell than you believed you did when you were an employee.

Figuring out your rate.

That takes care of time, but when figuring out your rate — that is how much you must generate per billable hour or day — often we forget about little things.  Little things like accounting costs, payroll taxes, self-employment taxes, utilities, equipment costs, marketing and advertising costs.  If you are in a consulting type practice and you are parsimonious, you might keep it down to 50% of your payroll costs.

So, if your target income is $80,000 per year, and you estimate your operating overhead at 50% of your payroll, that makes for $120,000 per year gross receipts in 110 days or around $1,010/day or $137/hour.  I’ll wait until the shock wears off…ok, let’s continue.

The most common mistake.

A common mistake is to forget to budget for the time and the overhead and end up with $80,000/260 = $308/day or around $38/hour and then wonder why you are starving and overworked in a year or so.

When you run your own numbers, be ruthless with that calculator.  If the final price looks too big for your market then either figure out how to earn that average rate – or pick another market.  Whatever you do, please don’t sell yourself short.

Until next time…

Image: Salvatore Vuono / FreeDigitalPhotos.net

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Looking for your first customer…

Reading time: 6 – 10 minutes

Woman Looking Through Binoculars

For any new business owner, the first customer is the most thrilling.  I can recall from years back the nervous excitement that accompanied closing my first sale.  It was true of every business I’ve ever had — and in each case I learned from the event.

So, what is a customer…really?

Let’s begin with the basics.  A customer is the only reason a business exists.  Without a customer, a business becomes a hobby; and while hobbies can be fulfilling, they tend to leave our wallets emptier at the end of the month rather than fuller.

So, who is your first customer?  Please note that this question can apply to any business, no matter how many years it has been in existence, because — unless it is stagnating — there will always be new products and services to offer and each of those new offers will have its first customer.

In order to define who will be our first customer, we must first get a better handle on what we mean by our customers in the first place.

A simple survey.

Here’s a challenge for you.  Conduct a simple survey.  Take an evening or a day and visit a dozen small businesses.  Ask to speak with the owner, and tell them you are doing some research for a school or other such inoffensive project.  Ask them, “who is your customer?”

I would not be surprised if the most common answer you received was “well, anyone” or perhaps with a nod to demographics something like “any woman between the ages of 18 and 80”.  You will be pressed to find, however, any business owner who can give you down to the age and hair color their “prototype customer”, the proxy for all the decisions they make.  Although this may sound outlandish, it’s just what Trader Joe’s did, as reported in the book “Made To Stick”.  Here’s the excerpt from a posting on Erica Douglass’ blog.

The good folks at Trader Joe’s decided their market was an “unemployed college professor who drives a very, very used Volvo.” They gave the guy a name (let’s call him Don for this blog post), a location, an age, named what kind of car he drove, wrote out his career path, and filled in as many details as they possibly could about him. Then they passed this guy’s profile around to all their decision makers.

So, back to basics. A customer is simply a human being with a problem that…

  1. …you are eager to solve and
  2. …they are willing to pay to eliminate.

The more clearly you can experience in your mind’s eye that prototypical customer, the easier it is to make decisions about what their needs are and how  your business can help them.

Why you don’t want WalMart as your first customer.

So what are the ideal characteristics of the first customer? Should it be a big company? A huge money-winner? After all, who wouldn’t like to name WalMart as their “first customer”?

You, that’s who, because if WalMart is your “first customer” you don’t own a business, you own an outsourced job working for WalMart purchasing and you can kiss your future goodbye. You’ll have freedom again after you sell out in a few years. If you survive that long.

Years ago, I had several very large customers.  The positive side was, of course, nice income.  The downside, however, was that I was at their mercy.   When you are dealing with an organization significantly bigger than yours, you simply don’t have enough leverage.  They become “the boss”.

The criteria of the ideal first customer.

In my experience, the first customer should meet the following criteria:

  1. They should be someone either you know or somebody you know knows
  2. They should be someone you enjoy spending time with and vice-versa (you’ll be doing a lot of that in the beginning)
  3. They should have a general problem you can solve
  4. They should be willing to entrust you to help them solve it
  5. They should be tolerant of the innumerable mistakes you will make in the beginning while solving it
  6. They should be willing to work with you to come up with other problems which you can solve for them
  7. They should be willing to recommend you to their friends with similar problems once you’ve solved theirs
  8. They should be respected enough by their friends that the friends will accept the recommendation

Notice I didn’t even mention “able or willing to pay you” because, for the first customer that’s irrelevant. Look at what you are getting for a little bit of your time and effort:

  1. A product development focus group
  2. Beta testers for your products/services
  3. Referral advertising to focused prospective buyers
  4. Public Relations
  5. The first entry in your company’s portfolio

What are the above worth? A little secret to share with you…businesses have been known to burn through millions of start up dollars and not have any of those five items to show for it. If you have all five in place, you are all but guaranteed to succeed.

If they are willing to pay, all the better, but what you charge the first customer doesn’t matter. It will be more than enough compensation to receive enthusiastic referrals to the second tier. I wouldn’t go beyond that without having a full pricing structure in place, but you will have happy customers quite eager to share their opinions about the value of your product/service by that time.

Where can you find him/her/it? Hint: try the mirror.

So where do you find this first customer? Often times you can simply look in the mirror and find someone who meets the above criteria. Quite a few products had their inventor as their first customer. And to those who would argue “I mean ‘paying’ customer”, remember you will be eating your own dog food. That should be payment enough — as long as the dog food is good.

If not, then stretch your brain. Make a list of who you know. Make a list of their problems. Ask. Ask if they know people with problems they are having trouble solving – especially in your area of strengths. Approach those people. Make them an offer. Ask for their help in getting started – not by investing their money, but by entrusting you to solve a problem for them.

And when you finally find that first customer, invest as much time, effort, and energy as possible until they are ready to recommend you to their friends. Once they are ready to recommend, you have a product/service worth selling.

Now that your first customer is ecstatic.

Now, work with that second tier. Treat them the same way only you are now looking to identify common problems that you can solve with a cookie cutter approach. That’s the path to hands off mass production. Once they are ready to recommend you to their friends, you’re ready to move to prime time.

You’ll still have a lot of work involved in creating successful advertising and marketing campaigns, but the hard part will be done before you spend your first advertising dime.  Looking for your first customer will be the most important step you taking to launching any new product or service.  Give it the attention and consideration it really deserves.

Until next time…

Image: FreeDigitalPhotos.net

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