The T-V-T Principle of Profitability(TM) (Part 1)
A glorious example of spam has been working its way across the worldwide web for years now. You've probably seen it, or a variation, at least a dozen times. The posting generally exhorts you to contact the sender immediately if you want to...
- Be Your Own Boss!
- Create Your Own Hours!!
- Have More Free Time!!!
- Have Unlimited Income Potential!!!
No, it's not an ad to subscribe to Nonprofit Consulting Review -- but it could be.
Pick any of the enticements listed in the spam. Admit it, one or more of these is what drew you to -- or is drawing you to -- consulting as a career.
And ain't being your own boss grand -- as well as being your own secretary, bookkeeper, and maintenance crew?
As for the hours, being a consultant certainly does allow you to create your own ... without the nasty restraints of labor laws and overtime compensation. We can create as many hours as we want -- usually in the range of 60 to 80 hours per week.
Plenty of "free" time, too -- all that time you spend on marketing.
All right, so the ad sounds like a phony come-on for a "consulting" (or envelope stuffing) job. Does that necessarily mean it's all horseradish?
"Unlimited income potential" is actually one of the truest and most attractive benefits of consulting. Why, then, does it seem so very hard to break even when you are starting out ... and harder still, once you're established, to reach the next level of consistently increased earnings?
It takes an understanding ... and implementation ... of the "T-V-T Principle of Profitability."(tm)
T-V-T stands for "Time -- Value -- Tangibles." The principle establishes how your profitability will increase as your basis for sales revenue progresses from time to value to tangibles.
Assuming you have an in-demand expertise such as facilitation, grantwriting, or strategic planning, and are consistently engaged in even a very basic marketing program, your income will depend -- almost solely and ultimately -- on the principle of profitability that governs your activity.
There is a good reason that newcomers to consulting have such a difficult time breaking even on a consistent basis during their first two years in practice. Most "how to consult" books offer a variety of formulas for determining your "hourly rate." This can lead one to mistakenly believe that "hourly" is the "right" way to charge.
In those first two years of practice, however, much of your time will be spent in networking, marketing, selling, and obsessing as you try to execute each consulting opportunity that comes along to perfection.
As a result, you will be working very few hours for paying clients. That's why it is so hard to break even. Of course, you could compensate for the dearth of paid hours by adjusting your fees upward ... $675 an hour will probably cover you, no? Working for clients for just a few hours a month at that rate will put you on your feet ... if you can find anyone who will pay that to a newbie.
It is no secret -- the only way to significantly advance your income as a consultant is to charge on the basis of the value of your work to the client and not on the basis of your time spent on the project.
How does selling value vs. time really work? This simple story makes it clear...
One day, the recently-retired maintenance engineer at a nuclear power plant received a frantic call from his former employer. "The plant has shut down -- there's a problem somewhere in the line and nobody can trace it down. Can you come right over and help us try to find it?" The gentleman was only too pleased to be called on for his assistance. He grabbed his tool chest and headed for the plant. When he arrived, he found a group of engineers and "suits" arguing in frustration over the costly problem. He calmly told them he knew exactly what was wrong. The group followed him down two levels, where he stopped before a complex pipe juncture. He struck it four times with a mallet and stood back as the equipment rumbled back to life. "That'll be $10,000," he told the V.P. of Operations, "do you need a bill?" The V.P. was stunned! "How could you possibly charge $10,000 for a few minutes work?" As he packed up his tool chest, the old engineer calmly replied, "I'm only charging you $1 for the five minutes' work -- I'm charging you $9,999 for solving your problem."
The sooner you begin charging for your work on the basis of its value to your client, the faster you will reach a consistent level of earnings. This is why it becomes so important to eliminate small agencies or agencies with small problems as soon as your credentials and experience will allow you to move on to larger organizations with more complex problems -- or problems that have higher stakes for the agency. The retired maintenance engineer could never charge his next-door neighbor, or even the local corner grocery, $10,000 for the five-minute fix of a pipe. He could only do so because of the value of the fix -- or the cost of the continued problem -- to his power plant "client."
This reasoning is the basis of the old consulting axiom that you should drop the bottom 15% of your clients each year. Replace them with clients for whom your expertise solves more "costly" problems ... thereby increasing the value of -- and revenue for -- the work you do.
Making the transition from time-based to a value-based consulting feels scarier than it is. Expect to have some clients question the size of your proposed fee ... that's the nonprofit client's job! Alan Weiss' book "Million Dollar Consulting" offers an in-depth treatment on value pricing.
Next week in Nonprofit Consulting Review: Part II of "The T-V-T Principle of Profitability"(tm) focusing on "tangibles," the key to mega-revenues.
Fare well, and farewell for this week ...