Ep. #60: The Opportunity Cost of Not Making Effective Offers

If you don’t know how to make effective offers, you are losing money. And the lost money is the tip of the iceberg. You’re also missing out on sleep, friends, the ability to live where you want, work when you want and with whom you want. Listen to this episode to find out why making effective offers is the one thing you need to do to earn money and have an amazing life.

TRANSCRIPT:

Welcome to Rich & Thin™ Radio, the only podcast that helps you earn more and weigh less. I’m Kelly Hollingsworth and if getting more bank with less bulk is what you want, I’m glad you’re here because I want it, too, and in this show we talk about how to make that happen.

The topic for this week is opportunity cost, and specifically we’re going to discuss the opportunity cost of not making effective offers. This will be the only episode for this week because the effects on your business and your body of not making effective offers are so related it’s difficult to separate them. Basically, this one episode this week is intended to communicate to you that the cost of not making effective offers is so high that it kicks the crap out of your entire life.

We’re going to look at exactly how this happens in a minute, but first let’s define our terms.

What is Opportunity Cost?

The Opportunity Cost of Not Making Effective OffersOpportunity cost is the benefit that is missed or given up when you choose one alternative over another. The most common and most expensive type of opportunity cost comes from not making effective offers.

What’s an effective offer? To tell you what it is, I’ll first tell you what it isn’t. I once had a client who was under-earning, and she insisted this wasn’t going to change. She said, “I asked for a raise, and they said no.” And I said, “What exactly did you say?” And she said, “I asked them if they were giving out raises this year.”

This is not an offer. This is going through the motions with no real expectations or even a hope of getting more money.

Notice the mindset. She was basically saying, “Hey, if you guys are misguided enough to voluntarily part with some of your cash, I’ll take some.” Notice also the mindset revealed by this message. She was basically thinking, “I’ll take whatever you’re willing to give, and if you’re not willing to give more, there are absolutely no consequences. I’m going to keep coming to work just like always.”

This kind of message and mindset never results in more money, and the cost is huge. If you don’t know how to make an effective offer, you are absolutely suffering astronomical opportunity costs. I see this so often I can’t even tell you. Today I want to walk you through one example in painstaking detail so you can see exactly how it works. This example is with lawyers—I work with a lot of them so I know their pain well—but if you’re not a lawyer, I still want you to listen as I’m going through this example, because all of these same concepts still apply to you. I’ll explain why at the end.

One Example of Opportunity Cost: The Cost of the “big law” job

The example we’re going to go through is the cost of the “big law” job. The high opportunity cost of the big prestigious law job at the big prestigious law firm. What I want to do with this example is show you how the math plays out in any opportunity cost analysis, by walking you through this one example with lawyers.

Let’s say you graduate from the top of your class at a top-tier law school and you get the highly-coveted “big law” job in New York City. After a handful of years, you’re probably working about 80 hours a week for about $290,000 in total compensation. To many of us, that sounds like a lot of money, but it’s not when you consider that the same lawyer working 80 hours per week without the law firm standing between them and the clients could easily earn five times that amount. The opportunity cost in financial terms is over a million dollars per year. It could be more.

Why? Because when you add it all up, before you even factor in commute time and time to get ready for work every morning, which can be substantial in a job like that, especially if you’re a woman, you earn $75 an hour. Think about that. Seventy-five dollars an hour to the best law students from the best law schools in the country.

I know self-employed bookkeepers who earn $75 an hour doing QuickBooks for small businesses. What attorney do you know who bills at $75 an hour? None, right? They don’t exist. Even the shoddy lawyers who graduated from Larry’s Law School charge more than that.

What would happen if our hypothetical big law lawyer got out from under the firm that’s keeping all the money? They could easily earn $575 an hour. With an effective offer, they could do this with their eyes closed, and they’d only have to bill 504 hours to earn it. That’s 42 hours per month, and of course, not every hour is billable. The American Bar Association says that billing 4 hours per day is a full-time job. So basically what that means is that 2 hours of work gets you one billable hour, in which case our hypothetical attorney would have to work 84 hours per month to earn the same money that a big law associate is earning by working 80 hours per week.

What happens if our big law lawyer who learns to make effective offers puts in the same time into their own practice? What does that look like? That looks like $1.1 million dollars per year. In other words, the big law job is costing our attorney a little over $800,000 per year.

And the money is just the tip of the iceberg, because what does your life look like when you work that much? Booking a vacation, having dinner with your family, spending time with your family, things like that, are nearly impossible. Even getting to the gym is difficult, so what does your body look like? What’s the opportunity cost in terms of your health? If you’re someone who needs 8 hours of sleep every night, as most of us do, your working and sleeping time plus 7 hours per week for getting ready for work and commuting, this is only one hour per day for both of those two things, leaves you 25 hours in an entire week to do anything besides sleep and work. And if you have a schedule like that, we know what those 25 hours per week look like. They look like you as a total basket case, crashing on the couch with some chardonnay or some chocolate or maybe some Cherry Garcia—pick your poison–and none of those 25 hours are enjoyable because you’re living in a constant work hangover, and you’re always on call.

So for the lawyer who’s achieved what’s typically viewed as the pinnacle of success in the legal world, life feels like anything but a pinnacle. To very loosely paraphrase a line from Jerry Maguire, it feels like an up-at-dawn, soul-sucking siege with no end in sight. Because what do you get if you do well at this law firm goat rope? You get a partnership. This is like winning a pie-eating contest and the prize is… more pie.

And to this, all I can say is, Ugh.

Where does opportunity cost come from?

The question is, why would anyone put up with this? Because they are terrified to make offers. They’re terrified of bringing in clients. They want a firm to do that, and in exchange, the firm gets to keep most of the money, while they do the work for about $75 an hour.

The numbers are even worse for law grads who don’t get the big law jobs. So many of my colleagues from law school were wringing their hands and practically living out of their cars working for a small law firm at maybe $15 or $20 an hour because they couldn’t get the big law job, and I’d say, “What are you thinking? You owe over $200 grand in law school loans.”

And they’d say, “I know. But I don’t know how to get clients.”

So what I want you to notice here is that making effective offers means having an amazing life and business. The refusal, the unwillingness, to make effective offers means the opposite.

Making Effective Offers = Having an Amazing Life and Business

When I was in law school, I worked for a law firm, and the deal was, you bring in clients, and do the work, and we’ll collect the fees and pay you half the money. And they thought I was going to keep working for them once I had my bar card, and I never went that route because I knew that once I had my law license, I could charge the clients less than what the firm was charging the clients, and I could earn more than what the firm was paying me. That’s a win for everyone, as far as I’m concerned, and it was a win I was eager to create in my own life, not just for the money, but because making offers and getting clients is fun, and here’s something else I want you to notice. Fun and money go together like Cherry and Garcia. The lawyer who does the work is called an associate. The lawyer who brings in the business is called a rainmaker, and in case it isn’t obvious, making rain is also where you make bank.

And this doesn’t just apply in law. My hedge fund managers who make effective offers make hundreds of thousands or millions of dollars per month trading for customers alongside their own accounts. Those who don’t make effective offers trade for themselves. They can’t find investors, and they’re missing out on this upside every month. The cost is in the 7 to 9 figure range.

I also work with a lot of coaches. If you’re a brand-new coach and you’re making effective offers, you’re earning at least a hundred dollars an hour. Experienced coaches earn hundreds of dollars an hour. If you’re offering a group coaching program that scales, you could be earning 7 figures on 20 hours per week. That’s a little over $1,000 an hour assuming you take 4 weeks of vacation each year. If you’re a coach who’s not making effective offers, one of two things is happening. You’re earning nothing, or you’re working for the coach who is making effective offers, at a fraction of what you could be making if you were the rainmaker in your own business.

It’s all about the offer, but so few of us see that, and so few of us see the staggeringly high cost of not having one. When I graduated from law school, a professor who’d come out of big law before she escaped into academia said to me, “You really should be applying for those big law positions.” And I said, “I don’t think so.” And she interpreted this to mean that I was afraid they wouldn’t take me. But that wasn’t what I was thinking at all. I was thinking that I didn’t want them, and the reason is because the opportunity cost was WAY too high.

What happens when you make effective offers?

I started my own firm right out of law school. In the first 18 months or so following graduation, I paid off over six figures in student loans, and I bought the mortgage on my house down by $130,000 to get the loan out of jumbo territory, so I could get one of those ultra-low interest rates. It was less than 2.6 percent at the time.

Did I work in that first year or two? Sure, but it wasn’t insane. I worked from home in my yoga pants. I went on vacations. I walked my dogs. I spent time with my family. I worked out. Made healthy meals. I planned my wedding. I went to Mexico for a week with my girlfriends as my bachelorette party. All of this was possible because I didn’t work anywhere near 80 hours per week.

And I got to live where I wanted to. My mortgage payment is kind of high because the tear-down I live in is on the water, but it’s about $1000 per month less than what I paid for a 2-bedroom apartment in Manhattan when I lived there.

Notice the difference between my experience and the typical new lawyer’s experience, even those who are working in the most coveted jobs. I had a life. I lived where I wanted, did what I wanted, when I wanted, and for only the clients with whom I wanted to work. And I made bank. I also set myself on a financial trajectory that most lawyers who are slogging it out in law firms never dream is possible. Instead of paying interest through the nose, I was saving interest. Thousands of dollars in interest every month.

Why was my experience so different? The only reason is because I was willing to make effective offers and get clients, and they weren’t. I’m telling you this story not to impress you but to impress upon you that the willingness and ability to make effective offers is the one thing that will determine if you’re going to live a wealthy, kick-ass life with plenty of cash and plenty of time to enjoy it, or if you’re going to have 25 discretionary hours per week in which to eat, socialize, shop, and do everything you want and need to do besides work and sleep and commute and get ready for work.

Not making offers = FINANCIAL DANGER

Whenever I go through examples like these, people like to tell me, “Well, oh, I know, I see that I’m giving up some upside, but at least I have the security of a steady job.”

When people say this to me, I want to run screaming off the edge of a cliff. I was talking with a client two days ago about opportunity cost. She’s one of my clients who came to me for help with her business. One of her challenges is that she, like so many others, has been operating under the illusion that the job is where the safety is. When we have this fiction running through our brains, we freak out whenever we think about doing anything in our business because it feels like we’re moving away from safety and heading towards a cliff. That’s how we feel when we think about leaving our job and doing business for ourselves.

And with this client, who’s been working to unwind those beliefs, she reached out and asked me to do an emergency session with her on Tuesday because the job that she’s been viewing as “safe” just announced that they are cutting her hours in half, and now she’s worried about making her mortgage payment.

She said, “I’m wondering if this is happening for me rather than to me.” And I said, “There’s no wondering about it. Getting rid of this employer is the equivalent of losing a bad boyfriend who runs up your credit cards, cheats on you, and is mean to your kids. It’s the best thing that could ever have happened, because every hour you’re working there is costing you money and wrecking your life.”

And to this she said, “I’m not a lawyer. Lawyers know what their hours are worth. I don’t know if that math applies to me.”

To this all I can say is that math applies to everyone. There is an hourly rate that is attached to whatever you’re currently doing for money, and it’s generally a lot lower than we care to admit. I have a client who’s working on growing her business, and her daytime hours are spent at a job where she earns $88,000 per year. Seems like a good salary. But add in her commute time, and she’s earning about $45 an hour. This client earns $135 an hour in her business.

I was explaining this math about opportunity cost to my client who just had her hours cut, and she said, “Oh. That’s a good way to look at things.” As if this were an interesting theory that she might want to try on someday. And I said, no, this isn’t a good way to look at things. It’s the only way to look at things. It is the math of the situation. Math applies every single time, so whether you want to see it or not, you are losing money every single day you go to a job that’s not paying you what you could be earning, and the only reason this is happening is because you’re thinking the job is where the safety is, and that prevents you from making effective offers.

So what are her alternatives here? She’s at a fork in the road. She can wait for someone, i.e. an employer, to make an offer to her, and then resume working for them at about one-fifth of what she would make if she’d made offers. Or she can get out and start making offers, and make five times as much money, and have a kick-ass life.

I hope what you’re gleaning from this is that the math applies to all of us. If you think your opportunity cost isn’t that high, rest assured, it is. Employers don’t hire employees at pass-through rates. Never do they think, “I can bill clients for this lawyer’s work at $500 an hour. I guess that’s what I’ll pay her.” No employer has ever said, “We’re breaking even on this employee. Terrific!”

If you’re sick of losing money every hour that you work, or if you’re not making money at all, and if you want to have more control over your life, your happiness, and the rate at which your wealth grows, get in touch. kelly@richandthin.com. I can help you learn to make offers than make you money. Thanks and I’ll talk to you next week.

HELPFUL LINKS:

Law Firm Hours – The Real Story

How much is your job really costing you?

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