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“Wing Theory” for Business

…so I was sitting around the other night, thinking about how business navigates the marketplace…and how the market may or may not actually respond as much like a fluid as many market professionals would like to believe.  If it were a fluid…[insert idea].

It occurred to me that Bernoulli’s principle is simply a scientific statement of how fluid reacts (pressure, speed, distance)…and that science is applied with great success for many innovations (not the least of which is an airplane wing).  There you have it:

WING THEORY for Business (TM) – utilizing Bernoulli’s principle as a creative basis to determine strategic modeling for business, where the market is a fluid.  Designing to gain altitude/distance or less pressure in business as a result of an efficient design.

I decided to diagram my thoughts as it relates to “altitude” in business.  A wing is for flight, right?  Let’s give your business wings.

I’ve attached a PDF for the curious and included preview images.

Bernoulli For Business (“Wing Theory” pdf)

 

 

 

In short – the innovative element of modeling a business in this manner is that it places a hierarchy on management, while also labeling (and illustrating) the most important component of a business (the “high spot”).  That “most important thing” is different in EVERY company (something that conventional business modeling doesn’t allow for as efficiently in visual depictions).

The tallest column in the structure of a wing determines both the radius of the wing and the potential for “lift”.  It illustrates a requirement for all the supporting/surrounding elements – what relevance they play in giving a business the shape necessary for strategic “lift”.  Weaknesses in a business model are more visually identifiable as well.

There is way more to it than that, but this 4 page illustration very clearly communicates the broad strokes of adapting conventional business designs, while treating the 21st century marketplace as it should be interpreted (a fluid that can be navigated with the right design).

It isn’t science as much as it is a really just a clever/visual analogy.  In any case, this depiction allows for the most simplistic illustration of three simultaneous components (all of which are sometimes difficult to communicate on their own, let alone together):

  1. linear hierarchy (business processes)
  2. business philosophy (brand & market focus)
  3. management strategy (strengths are strengths)

Enjoy,

Mark

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By · March 28, 2011 · Filed in Business Philosophy, Licensing & Intellectual Property, Marketing, News & Thoughts, The Economy · Enter your password to view comments.

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Valuing a “service”

One constantly shifting factor in a service business is finding that magic “happy medium” between the divergent concepts of “cost” and “worth” (what it costs your business to be useful to a client and what you think your clients are willing to pay for something useful).

In today’s economy, keeping a steady workload can sometimes force you to abandon both of those considerations in favor of approaching the problem from a more survivalist approach: “How cheaply can I afford to offer my services?”

Before you undervalue your services for survival (or undermine the market your competitors have established FOR YOU), let’s take a look at the cost of doing business.  In this example I’ll break down a Owner/Operator service business (Self-Employed “wage earner” as opposed to “business owner” who employs many).

There is a dramatic difference between earning a wage and owning a business – I’ll discuss that in another article.

In either case “time is money” as they say – so I’ll start with wages (and some assumptions):

  • Assumption 1: Let’s say you’re a billable independent service provider w/$15k in supporting equipment and/or software (musician, photographer, videographer, graphic designer, web designer, writer, analyst, etc…).
  • Assumption 2: You don’t have any employees and your business operates with the least amount of overhead possible.  Whenever something gets out of your area of expertise you hire other subcontractors to help you pick up the slack.

TIME: For this example I’ll use a $50,000/year salary as a baseline (rough national average).

For a W2 employee earning $50k/year it would cost the employer about $65,000 per year (taxes, benefits, insurance, etc…).  Sole Proprietors are not W2 employees but they do still have liabilities on their earnings and a responsibility to their retirement planning, all of which will likely make their costs about the same.  That means if you want to earn $50k/year you have to bill $65k/year (that is the base pay multiplied x 1.3).  Want $100k a year? Use $130k for the math.

MATH:

  • $65k/52weeks = $1250/week
  • $1250/36hours = $35/hour

Why 36 hours?  Even if you work a 50 or 60hour work-week it isn’t all billable to a client – you own your business and you don’t charge your customers by the hour to do your own books, deal with your accountant, plan your marketing and advertising, pay your bills and bid jobs, etc…  It is reasonable to assume you will burn at least 10hours a week that you aren’t paid for.

Using the above math we have established that your survival as a “wage earner” (not a business owner) requires you to bill for your time at a minimum of $35/hour and for a minimum of 36hours/week (assuming all client expenses are reimbursed at exactly what it costs you).  That’s the cheapest you can work (before factoring in anything like additional equipment, job materials, insurance liability on subcontractors, etc…).   It doesn’t matter if you work in your business (or on your business) for 60 hours each week – you still have to bill at least $35/hour for 36 hours (or $1250/week).

OVERHEAD / SUBCONTRACTORS:

To determine whether you are charging the appropriate markup on subcontractors/vendors, you simply need to determine three things:

  1. Does the difference between what you pay your vendor and what you bill your client equal your minimum rate after factoring in the amount of time it takes to manage/communicate with that vendor? ($200 in markup in a situation that takes you 10 hours to coordinate the work of your vendor only equals $20/hour).
  2. Can your subcontractors/vendors provide services at lower rates than you presently charge your client? (if there isn’t any built-in margin you will want to either raise your rates to create a natural margin or value a quote using #1 to calculate the margin)
  3. Is the perceived value of what you can provide by using a vendor or subcontractor worth the “perception” it has on your rates? (if you charge a customer $35/hour but your graphic person is charging $100/hour what is the perception of your talents to your client?  This is how you determine whether you quote a “project” or an “hourly rate” because the perceived value of a project may be completely different than the perceived value of your time).

ASK YOURSELF (do these assumptions match your business):

  1. Can I bill 36hours/week in my field? (If not, you need to divide your weekly target by however many hours you can actually bill to a client).
  2. Can the clients that I have access to afford my rates?
  3. Can I deliver my service reliably at this rate? (and have client successes result in more work)
  4. Is my rate too affordable (this is a perception…and is mostly based on the market you work in – sometimes pricing yourself too low can actually hurt your ability to be taken seriously)
  5. Am I valuing the cost of my education?
  6. Do I have more than $15k in equipment?
  7. Are you above or below “average”?

In Short (this example):  The least you can charge is $35/hour.  The most you can bill is 36 hours.  Is that a value for a useful service?  Is that enough to survive in your world?

PERSONAL TAKE:

At Mahar Enterprises, Inc. our base rate is $65/hour (which is based on my personal baseline for all consultants).
The only time we charge more is when we can’t handle a scope of work with our existing pool of talent (or when travel is required).  Travel changes everything – if only because most of the expense of my business is the equipment, software and technology which all live in my office (it isn’t as mobile as I am personally; I still need it outside of my office; and it has to be “duplicated” at a cost that is always applied to client’s project).  We have established a few services which are budgeted lower because we have made them more efficient.

In some cases they have been eliminated as a client expense because it replaces “advertising”  – a cost we would otherwise incur, so we can afford to apply the savings to that service.

Our competitors charge $250/hour for some of the services we provide.  We have chosen to undercut the market so aggressively because the concern of “perceived worth” is less important to me personally.  I prefer to focus on actually “delivering something that any client can afford” (and doing it better than someone who charges much more).

Because our core services are either “Delivery” or “Management”, we can remain focused on the simple cost of “our time in delivering the service” (and not worry about the perceived value of what we are delivering).  Vendors worry about that, not us.

Each business is different.  I value services based on my ideology of “removing handcuffs” from business owners.  Everything has a cost.  We operate on the most basic “Cost +” mentality rather than the value method our competitors and clients use (their method being more of a salespitch or rationalization which says, “this saves you $X so it is worth $X”).

Let’s be honest: If it doesn’t save you money or make you money it’s not worth doing.  The perceived value and the cost are two different things.  I couldn’t care less what someone says a service is “worth”…all I care about is that my clients can afford the “cost” (and that the cost is worth incurring).  In answer to that question we’re always the most affordable and creative solution so I don’t have to defend the perception of “value”.

TO BE CLEAR: We don’t always recommend the “Cost +” approach for our clients in THEIR BUSINESS because the reality is that successful business revenue models rely on exploiting “perceived value” (in my business, however, I’ve reserved perceived valuations for PRODUCTS…not SERVICES).  For the purposes of Mahar Enterprises, Inc. we’ve simply shaped our perceived value as “the most affordable solution for a truly necessary service” (rather than demonstrating “return on investment” in order to emotionally provoke clients to choose us over our competition).  I personally find it easier to clearly say to business owners “once you decide something is necessary to your business, we are without question the most affordable place to get it done properly”.   That approach may or may not work in your business but it works for mine (but I am also a business “owner” instead of just a “wage earner” – as mentioned, I’ll discuss the distinction in another article).

Feel free contact me to schedule a valuation study of YOUR RATES.  We can do it under an hour, in real time and it costs $65.  We conduct our services with complete confidentiality.

Regarding MY VALUE: I look at it this way - if a client doesn’t feel it is worth $65 to formally dissect their rates/business and gain access to some really candid/helpful advice, they might as well stop shopping consulting services in general because my competitors start at $150/hour….and I already delivered free advice (above).

Doing business is easy…but only once you’re valuable and useful…as an enterprise.  That starts with “rates”.

- Mark

UPDATE: 9/24/11

After 11 years of operating with minimal overhead and providing all services exclusively with in-house talent, our workload has required that we add production personnel and programmers (all of whom are $100/hour or more).  As a result, we’ve been forced to modify our rates.

Beginning October 1, 2011 our 2012 rates will go into effect at $130/hour (which is a 30% margin on contractors, and includes use of all production facilities at our disposal [no room rental fees for any production, taping, broadcast or commercial media]).