Addition vs. Multiplication
Leverage is not addition; i.e., 3+3=6. Leverage is multiplication; 3x3=9. Multiplication creates a greater outcome than addition.
Let’s apply this to our expertise-based business, contrasting growth through addition against growth through multiplication.
Example: HR Consultant has annual revenue of $300,000 by delivering her proprietary diversity training program (her “Program”) to corporate clients, charging $3000 for each in-person one day training. She delivers 100 trainings per year to 20 clients, or about 2 per week, plus travel. In other words, each client is worth approximately $15,000 per year. Her goal is to grow her revenue by at least 50% next year. Her current pace is unsustainable; she must decrease her time on the road. For her to deliver 150 trainings per year would be…insane. Our consultant acknowledges that no more than 80 trainings per year is sustainable. For the purposes of this analysis, let’s assume $3000 per training is what the market will bear.
Growing Revenue the Addition Way: To reduce her hours by 25% while growing revenue 50%, she must double the number of experts.
Yes, the revenue has increased by 50%, but look at the gross profit, both cumulatively and per expert. There will be some growth in net profit as expenses shouldn’t increase at the same rate as labor--you won’t need another accountant, for instance--but growth will be quite flat.
Growing Revenue the Multiplication Way: Instead of increasing revenue by hiring additional experts, she adds the option for a client to license her Program and have the client’s in-house HR team trained to deliver the Program. The client’s HR team now becomes to an additional expert who can deliver the Program to the client. Each of the clients that choose this option becomes a licensee. As a licensee, the client pays an annual license fee equal to $10,000 per year, a 33% savings from the average $15,000 per year plus the ability to deliver as many trainings as they like without incremental third party costs. Let’s say that 50% of her clients choose to switch. By training the HR teams of 10 of her 20 clients to deliver the Program themselves instead of our consultant delivering the Program several times a year, she can handle 40 total clients. Her annual revenue mix would be: (i) 10 in-person clients at $15,000 each per year, plus (ii) 30 licensing clients at $10,000 each per year.
Her revenue has increased by 50% as it did with the additional expert, but compare the gross profit, cumulatively and per expert. 🤩
This is exponential growth. This is leverage. This is a prime example of the benefits of selling expertise, rather than selling experts.
There are other intriguing ways to create leverage using your expertise. Interested? Let's chat.