Finding Mr. Green

What are you worth?

Your services, your products, your company? Whether you sell yourself to one client with an employment contract or put it out to the market as an entrepreneur - fundamentally you get to choose.

Now granted one of the most significant differences between gainful employment and self employment is how and who defines the value of your product or service. If employed then the company has to resell you for a profit. If self employed then that difference is the profit your company makes.

Fully understanding this concept is the single most important measure of success. How much am I worth? is the fundamental question and holding to the answer. And the market place will always validate it.

I have worked with over two dozen start up businesses in the past decade. Six have grown to over one million dollars in sales within a year. This fundamental question has been our starting point in creating a vibrant, successful business plan. It has driven our decisions about product/service mix, target audience, and marketing message.

In the popular show Big Bang Theory Penny was telling Sheldon about her part time business which typifies how many small businesses start.

 Penny: "I’m making flower barrettes called Penny Blossoms. I made one for myself, then all the girls at work wanted one. Then I showed some to this lady who runs a shop in Old Town. She said she wanted to sell them. I said okay, and in one week, I made a $156. If this takes off, I won’t have to be a waitress anymore. What do you think? This could be a business, right?"

Almost every employee has had these thoughts about taking a hobby or passion and creating a business. When I was in the police service my partner was an avid scuba diver. At one point he took the plunge (pun intended) and bought a dive shop. For a while he was finally working his passion. But two years later he was back being a cop when the realities of business ownership (specifically a dive shop in a land locked prairie city) proved to more costly than the dream.

Sheldon: How many of these can you make a day?

Penny: About twenty.

Sheldon: And how much profit do you make per Penny Blossom?

Penny: I don’t know, like, 50 cents. I’m not sure.

Sheldon: No, Of course you’re not. All right, ten dollars a day times five days a week times 52 weeks a year is two thousand six hundred dollars.

Penny: That’s all?

Sheldon: Before taxes.

Penny: Well, I don’t have to pay taxes on this stuff.

Sheldon: I believe the Internal Revenue Service would strongly disagree.

Sheldon points out the vital importance of knowing your numbers which Penny is foggy on. So he quantifies it by timing her rate of production.

Sheldon: All right. 12 minutes and 17 seconds. That’s 4.9 Penny Blossoms per hour. Based on your cost of materials and your wholesale selling price, you’ll effectively be paying yourself… $5.19 a day.

Penny: A day?

Sheldon: There are children in a sneaker factory in Indonesia who outearn you.

Penny: That just can’t be right.

Sheldon: You’re questioning my math?

The nice thing about math is that it rarely lies but it's accuracy and usefulness are based on the assumptions used. It is easy to get crystal clear accurate answers to questions that don't solve your problem. Which is why, in my opinion, there are only three kinds of people in this world. Those who can do math and those who can’t.

Now obviously BBT a tv show based on a comedic premise of having a gang of university physicists producing 1000 units in 24 hours at less than minimum wage. Sheldon accepts the basic premise of what Penny was charging which would have been the first assumption I would challenge. Penny was not charging enough. However regardless of price she did need to increase production, decrease assembly times and expand her marketing. With Sheldon's help she got production under 3 minutes. Leonard created a web presence that apparently captured a 1000 unit order within a few minutes of going live. An amazing advance but at best would only earn her a few hundred dollars.

The answer to this fundamental first question is always what does the business need to earn – in profit - to justify its existence. Now obviously the market place does not care what you need to make. They will only ever pay you what they believe the product is worth to them. But it is a reasonable starting point. If their expectations do not meet your needs then focus your efforts someplace else. Not every idea needs to be advanced. And the price you choose has a great influence on how you are perceived. There are ample scientific studies that prove the perception of value related to cost.

A hot dog vendor was serving the downtown lunchtime crowd. He set a price of $3 to compete with other carts in his market. His cost was $2.25 per dog. He had a good location and did a steady business but realistically he could only serve about 100-150 dogs in the 90 minute daily peak for his business. Over time he cut back on condiments, found a lower cost supplier for his dogs and buns managing to squeeze out another 25 cents profit. But at best he was delivering a lunch experience that was mediocre and forgettable. On a good day he profited $100.

A new competitor opened in the next block with 3 different types of ketchup, four types of mustard, big fat fresh buns, music playing and Alberta raised all beef dogs His price was $10 on a $5 cost. He also had a steady business with constant lineups, massive repeat business, and lots of customers picking up 2-3 dogs at a time for other people not in line. A good day profited over $600. Yes he had a superior product with a much better lunch time experience. But mostly he was bold in setting a price that was profitable and the other variables fell into line.

He did not cater to the lowest price consumer and realized that his competition was not other hot dog vendors but rather every other restaurant in the area which made $10 a reasonable price. Over time he hired another worker simply to take money and make change freeing up time and increased product delivery at his stand to 150 dogs per hour. Within one year he was operating in six different locations selling 1000 dogs daily - over lunch - 5 days a week as he had established a brand - all staffed by employees.

His business plan written a year before was to create a company grossing $10,000 per week. A half million annually. He was never in the hot dog business. He was in the lunch time experience business with hot dogs simply the vehicle. Start with the end goal in mind and work backwards.

Rule 1 – set a bold price – it is synonymous with higher quality all other things being equal. I charge $150 per hour because my clients earn far more than that taking my advice. The number you charge needs to be profitable at a reasonable and expected level of sales and should initially be more than you feel comfortable with. Its easier and more manageable to sell 50 dogs a day with a $5 margin than 100 at $2. If you start with capacity to grow then it is possible to experiment with increased market share projects then needing to be a full capacity just to break even. Now you can lower prices occasionally for special promotions. It is always easier to lower a price than raise it.

Rule 2 – make sure you get paid. Ideally look at ways to work on a retainer. Get money up front. Pre-sell your products. Offer deals for bulk purchases. Offer a money back guarantee. The money is always better in your pocket than the customers. Plus the client is always more committed to the process when they have money in the game. That means you must always be willing to walk away. Matthew McConaughey portrayed this rule very well in Lincoln Lawyer looking for Mr Green.

YouTube of Mr. Green

Obviously there are a number of considerations in terms of creating the experience that clients want to pay for. It is vital to use the Partner Principle in expanding your business based on Utility Theory. But if only more businesses simply followed just these two things there would be a substantial decrease in companies going out of business.