How do you tell if someone is wealthy or not?
When I was growing up, my framework was the same as everyone else’s. If a family lived in a nice home, drove fancy cars, and went on exotic vacations, then they were rich.
But then a few things happened that changed my perspective.
The economy crashed in 2008. So many of the families that I thought were “rich” started to really struggle. They appeared to be rich but they actually didn’t own that many assets.
A few years later I read “The Millionaire Next Door,” which gave me further insights into personal finance. It talks about how the average millionaire lives pretty modestly, and you wouldn’t be able to spot them in a lineup.
Nice cars, houses, and handbags were signs of luxury, but they weren’t necessarily signs of wealth.
I’ve come to realize that this same principle applies in business.
I’ve met tons of entrepreneurs over the past decade. Sometimes I’ll meet someone and right off the bat, they’ll brag about how much revenue they’re generating and how many employees they have.
One thing I’ve learned is the ability to separate vanity metrics from true progress.
Vanity metrics are the things you can measure, but they don’t really matter. They are numbers that sound great on paper, but they don’t necessarily indicate a healthy business.
Here’s a quick example:
Imagine that you met someone named John.
John owns a company that does $3 million a year in revenue. He has 2 million subscribers on YouTube. And he has 15+ employees.
He sounds pretty successful so far based on these metrics.
Here’s the problem…we have no idea if that actually is a healthy business or not. We have indicators of revenue, YouTube subscribers, and employee count, but those are all vanity metrics.
He could be doing $3 million a year in revenue, but he’s only generating $50,000 in profit.
He could have 2 million subscribers on YouTube, but he doesn’t own the data of any of those subscribers. His business is at the mercy of the ever-changing Youtube Algorithm. In 2017 he was averaging half a million views per video, and now he’s averaging 10,000 views per video.
Note: Even though John is fictional, I pulled these numbers from a real YouTube channel. It happens when you build a channel on a trendy topic, but then people are no longer interested in it anymore.
Want to get an idea of how well someone is doing in business, but you don’t feel comfortable asking about how much they’re making?
A sneaky way of getting an idea would be to ask someone how many employees they had. Someone with a ton of employees must be doing great right?
Well, not really.
Advances in automation and software in the past two decades means you don’t need as many people as you did in the past.
Does a contractor working 20 hours a week count as an employee?
10 programmers sound more impressive than having one programmer. But what if that one programmer is a top of the line getting paid $150,000 USD a year vs. 10 low-quality programmers making $15,000 a year?
Managing 15+ employees to make $50k profit? Building a business based on a social media platform that you have no control over?
That sounds like a stressful business. I’d rather be an employee somewhere than to deal with that kind of headaches,
What’s the problem with vanity metrics? They can steer you off course from making real progress.
Imagine building a business and focusing on how many Instagram followers you have.
So the question is, what is real progress in business?
Measuring The True Progress of a Business
What should you focus on when building a business?
1. What’s your company worth?
Some people measure their business’s financial success based on how much profit they bring in per year.
Another way you can measure success is to figure out how much your company would be worth if you were to try and sell it.
Some business models can generate a ton of cash but aren’t worth anything. Unfortunately, no one’s looking to buy an affiliate marketing business. The same goes for any business where it’s too focused on a personal brand.
But some businesses can sell for a multiple of what they make each year.
Company A is a consulting business that makes $1m profit a year. It’s not really sellable.
Company B is a SAAS business that makes $1m profit a year. But because of the business model it deploys, it can sell for maybe a 6x multiple at $6m total.
2. How much control do you have?
I know plenty of sellers on Amazon who are making bank.
But deep down they’re all nervous about their business. Amazon has too much power over their business.
Amazon could come out with an AmazonBasics version of their products and crush them. Amazon could ban them from selling on their store for whatever reason.
An algorithm change could mean that they’re products are no longer ranking high in Amazon search.
The less control you have in your business, then the riskier it is.
Here are some examples of taking more control in a business:
- An Amazon seller should take some of their earnings, and invest it into marketing onto other channels such as paid traffic of SEO on their own website.
- Your supplement business is growing. However, there are quality control issues with some of your products. You can’t do much about it because you’re private labeling it from another company. Owning your own plant and manufacturing the product itself means more control.
- Are you inventing a new method or technology? Getting it patented could prevent competitors from ripping off your ideas.
You don’t have much control at the beginning of a business. But as you build more skills, reputation, and financial power, you should slowly start thinking of ways to invest in getting more control.
3. How much do you enjoy what you do?
This is your business. You’re spending a significant amount of your life energy and talents building this baby up.
Do you enjoy the business that you’re in? Do you enjoy what you’re doing on a day to day basis?
I’m always looking out for new trends and business ideas. I saw one report that the sex toy market is set to explode.
But it’s not a business that I’d feel comfortable being in, no matter how much money it can make.
Maybe you love your business, but you find yourself spending too much time doing the things that you don’t enjoy.
In that case, you need to invest in hiring and training better people, and building better systems.
4. How much does your business rely on you?
Here’s an easy way to think about how much your company relies on you.
Imagine if something happened and you’re in a coma for the next six months. How long could your business survive without you? How much money would you be able to bring in?
For most people, it’d probably be $0.
The less that a company relies on its CEO, then the more valuable the company becomes.
It’s risky for a company to depend so much on its CEO. You could have a health scare or get hit by a bus tomorrow.
5. How predictable is your revenue?
A lot of overhead and expenses are predictable. You have to pay for your office space, benefits, salaries, software subscriptions, and more.
It’s scary if your expenses are predictable, but your earnings aren’t.
You also have a better and more robust business the more predictable your revenue is.
Some companies have business models and strategies that make the revenue very predictable.
I remember when a decade ago people rarely switched their cell phone company. Back then changing your carrier meant you also had to change your phone number. It’d be a pain in the ass having to message everyone your new number.
I use InfusionSoft to handle my emails for this blog. The costs keep increases and I have thought about switching providers several times.
But the “switching costs” of going over to a different software is so high that it prevents me from taking action. They have a customer for life.
You should always think about ways to make your business revenue more predictable.
- You’re selling consulting services by the hour. You can start gaining predictability by putting people on a monthly retainer package.
Before: $300 an hour. Book me anytime.
After: $1,000 a month for a minimum six months. It gets you 3, one hour calls a month.
- You’re selling one-off e-commerce products. You can add in monthly subscription options. Every time I try to order something on Amazon they’re pushing me towards subscribing!
5. Do your employees enjoy working there?
I use to have a take it or leave it attitude when it came to employees in my mid-twenties. No one’s forcing you to be here. If you don’t like this job, then go find another one. Go start your own business.
My tone has changed a lot over the past several years.
If you have quality employees, then they have tons of opportunities everywhere else. It’s an honor for me that they would want to work with me.
People depend on them. Their kids depend on them. They depend on you. You shouldn’t view employees as disposable – it’s a responsibility that they’re placing onto you.
How can you create an amazing working environment so that they want to stay there? Turnover and trying to hire new employees is time-consuming and expensive.
- Do they feel that they are fairly compensated?
- Do they feel challenged and fulfilled by the work?
- Are they proud to work at your company?
- Do they feel like they have great relationships with their managers and co-workers?
- What are they saying about you and the company when you’re not around?
This also applies to every partner you’re working with – contractors, vendors, suppliers, etc.
6. How happy are your customers?
How happy are your customers with your products and services?
Are they recommending it to other people naturally? Are some of them going from customers to raving fans? Are they turning from first-time customers into repeat ones?
On the other hand, bad customers can hurt your business. At the extreme end, you could be getting sued. Bad reviews can wipe out years of marketing efforts.
I think having happy customers should be a mark of making progress in your company.
Progress Won’t Happen Overnight
In order for you to make progress, you need to realize what to focus on.
What’s the point of having a huge email list, if no one is opening any emails because they don’t find any value in it?
Having a huge staff is impressive, but labor isn’t the best form of leverage. Instagram sold for a billion dollars with just 12 employees.
I’ve noticed that a ton of vanity metrics happen because someone wants to increase their status.
You have to remove your ego when it comes to measuring progress.
It’s easy to convince yourself that certain activities are helping your business when in reality, you do it for ego and status reasons.
Do you want to look like you have a great business, or do you actually want to own a great business?
They are two different goals with opposite strategies.
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