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CB-004: Poor decisions cost how much?!?
How making money can cost you more
Zack Monninger
May 07, 2023
For everything you have missed, you have gained something else, and for everything you gain, you lose something else.
Hello, CubeBreakers!
This is my 4th newsletter. So be nice. Or not. Feedback is welcome (seriously just hit reply and say hello!).
Why You’re Here: To escape the 9-5 and build your own thing.
Why I’m here: To short-circuit that journey.
What’s New: Last week’s edition went out to 37 subscribers. We’ll be over 60 this week! Please feel free to pass this on to anyone who you think will find value.
We’re now moving into the “foundations” section of our roadmap.
There’s a limit to what we can cover in a ~5-minute read, so I’ll focus on a few concepts I think are critical to a successful journey.
Today’s Topic - Opportunity Cost
The Situation
Understand what opportunity cost is. Learn how to apply it when you make decisions.
The Textbook Defintion
Opportunity Cost:
The loss of potential gain from other alternatives when one alternative is chosen.
Why you need to care:
Nothing benefits you more than making good decisions consistently.
It’s like compounding investments in a retirement account.
What’s the single best tool for consistently making good decisions?
Understanding opportunity cost.
Let’s Meet Data and his buddy Algo
Data is our stand-in aspiring solopreneur. He has a friend named Algo.
Data has just launched his solo business. He has zero clients and zero revenue.
He gets a call from Kilo who wants to hire him for a project.
Kilo wants to pay Data $500 to do a thing that Data does.
Data knows this is a 20-hour commitment.
He also knows his goal is to generate $100 per billable hour.
But Data has no clients and no revenue. What should he do?
Algo thinks it’s a no-brainer.
“Dude - you have nothing. Take the project. Build a portfolio. Get a testimonial.”
Data is less sure. He knows a testimonial would be good.
But he also wonders what else he could do with 20 hours of his time?
Data’s Thought Experiment
Data thinks about all the ways he could spend that 20 hours.
Taking a course on marketing
Cold reach out to potential clients
Generating quality content for his website
Teaching himself Google Adwords / FB ads
None of those things pay $500 today.
But does the compounding effect of their value exceed $500 going forward?
Data believes that spending 15 hours doing business development can land him one 5-hour project at $500.
He wonders how those two scenarios play out.
Data decides not to view this as a one-off decision.
Instead, he wants to understand the compounding impacts of making this decision the same way over and over.
Scenario A
Data considers a business that delivers free clients over and over.
Each client pays $500 for a 20-hour project.
They come back for more work and refer their friends and colleagues.
From this day forward, Data has 40 hours of work each week.
He could work more hours and generate more cash if he chooses.
Scenario B
Data considers the scenario where spends lots of time finding a better client.
Each week, Data invests 30 hours in finding 2 better clients.
Those clients each pay $500 for a 5-hour project.
Those clients return once per year at the same value.
Doing the Math for A and B
Scenario A:
Year 1: 100 clients. 2,000 hours of project work. $50k revenue.
Year 2: 100 clients. 2,000 hours of project work. $50k revenue.
Year 3: 100 clients. 2,000 hours of project work. $50k revenue.
Year 4: Data feels burned out. He wants more cash so he works 60-hour weeks now and generates $75k. That old 9-5 doesn’t sound as bad as he remembers it…
Scenario B (math is trickier here but don’t worry - I did it!)
Year 1: 100 clients. 1,500 hours of business development. 500 hours on project work. $50k revenue.
Year 2: 100 returning clients. 75 new clients. 1,125 hours of business development. 875 hours of project work. $87.5k revenue.
Year 3: 175 returning clients. 56 new clients. 845 hours of business development. 1,155 hours of project work. $115k revenue.
Year 4: Data is happy. He works ~25 hours per week generating $115k in revenue. He fills his spare time with passion projects. Referrals have him turning down work. He fires clients he doesn’t like.
The Takeaway
The Mistake is never stopping to think:
“What else could I do with that 20 hours?”
Could that have been a one-off decision? Sure.
But why? For one testimonial?
Is Data really going to turn this guy down when he comes back next month?
Or reject the referrals Kilo sends his way?
→ We want to ground ourselves in good decision-making from day one.
→ Always evaluate the opportunity cost.
→ Take small victories.
→ Form good habits.
A scenario Data didn’t explore was to take this project but tell Kilo it’s a one-off discount.
Let him know the next project will cost $2,000.
If Kilo balks - no problem. Not a client Data wants. Not worth $500 and 20 hours.
It’s OK to offer discounts. It’s not OK to ignore the opportunity costs that go along with them.
Play the long game.
Until next time - LFG.
-Zack