In life and business there are three basic tensions, Cost, Time, and Quality. Is it possible to achieve high quality, at low cost, in a short period of time? Probably not, so if you see an opportunity that promises this, it is probably hiding something.
To reduce cost usually requires a reduction in quality, or a longer timescale.
To reduce the timescale usually requires an increase in cost, or a reduction in quality.
To improve quality usually requires an increase in cost, or a longer timescale.
So what is the best way to balance these?
I would suggest that you start with identifying what you can’t change. For example, do you have a fixed budget, a timescale that can’t be changed, or an expected level of quality? And start there. Once you have a starting point, your options become clearer.
You can generally agree on two of the three factors, and have to accept the third. You want it high quality and now? You may have to pay for it… You want it now and cheap? You may need to accept low quality…
If you are challenged on why the cost is so high, the timescale too long, or the quality not up to standard, think about what you can do to one of the other two factors.
I was helping a client today to prepare a budget. Due to the kind of work they do, we spent a bit of time talking about how much something costs, and how much something is worth. Let’s call the first it’s cost, the second it’s value.
When working out how much to charge for something, do you start with its cost, or its value?
From a customer’s perspective, they are interested in value for money, so your question should be whether there is enough of a difference between what they pay (Value) and what you spent on it (Cost). Assuming you sell for more than you paid, you make a profit. The eternal question is whether it is enough profit. And how much is enough?
It is a curiously English attitude that says we should “only” make a certain profit margin. I speak with many business owners who feel that to make “too much profit” is wrong. Some feel uncomfortable with making “too much profit”. But how much is too much?
I would encourage you to charge as much as you can; after all, if the customer is buying then they must feel they are getting value for money. Competition is the best gauge to what the market is prepared to pay.
But what if there is no competition – is there a limit to your profit margin?
Time is money. We all know that. But do you know how much your time is worth? I recently helped a self-employed client work out this cost, and thought I’d share the process.
The starting point is to work out how much it costs to “keep you alive” each month. This should include your rent or mortgage, your utility costs, average food bill, travel costs, a contribution to a small annual holiday, and a little contingency “just in case”. Let’s say, for example, that this amounts to £1,200.
You now multiply this cost by 12 to get your annual cost: £14,400.
Assuming an average working year of 220 days, you need to earn just over £65 every day to stand still. However, that’s after paying tax. So your gross earnings would need to be in the region of £80 per day.
So assuming an 8 hour day, it costs you £10 an hour to sit still.
It might not sound much, but every hour you don’t earn means you have to earn more in the other hours. Let’s say you only earn in 60% of the time. You need to charge about £135 a day, or £17 per hour.
So when you sit down to read or do something that you are not being paid for, ask yourself, is it worth £17 per hour?
The first was a conversation with an ex-colleague, who told me with glee how she had just bought a house for £205k that only a few months ago was on the market at over £270k. With a little jiggling of her personal finances and a good mortgage broker she had clinched the deal. Knowing the area I think she has bought something between a bargain and a fair price (the property prices had been unreasonably high).
The second was while watching the news and being “told” how the public is increasingly reluctant to pay for large items, choosing to wait until the price falls further, creating deflation.
Of course, the trick is to spot the bottom of the curve. But how material is the potential saving between now and the bottom of the curve? Is the idea of a bargain always more attractive than the actual saving achieved?
Is there a cost for your time and profit/pleasure foregone you need to factor in while waiting for a deal?