The Psychology of Profit
How to adapt your mindset to survive in the new economy
How to adapt your mindset to survive in the new economy
As I left San Diego in 2011, the city clearly whispered: “your work can wait, go surfing.”
Uber was just two years old, while Lyft and Instacart were still glimmers of ideas.
When I visited again in 2016, something had changed. In Mission Beach, the surfer culture was still there, but there also was this frenetic energy. Meeting a neighbor for lunch, I discovered he worked in Pharmaceutical sales: fertile ground for the 9–5, employee mindset. I smugly waited to hear the usual stories of employees: nights getting wasted, weekends lost watching football, debates over small consumer purchases.
But then he shared the coaching business he was developing, and confided “I feel like if you live in San Diego, and you don’t have a side hustle, you’re a loser.”
How did the prototypical 9–5 surfer bum adopt the culture of hustle?
He made a shift in his definition of profit.
Redefining Profit
If you’re like most people, your first notion of profit is probably money. Google offers this:
Profit: a financial gain, especially the difference between the amount earned and the amount spent in buying, operating, or producing something.
For employees and large businesses, this is an acceptable definition: time is either traded for a flat salary or purchased in large quantities.
If you currently freelance or have a small startup, you need to expand your notion of profit.
For the smaller venture, profit is the gain, in time or money, from buying, operating, or producing something.
If an employee pays for an Uber ride, they just consumed a luxury. If a business pays for an Uber ride, it is a cost.
If a freelancer or entrepreneur pays for an Uber ride, they just gained time from buying something. Profit.
If an employee visits a doctor, they consume healthcare. If a business pays for a doctor, they mitigate some risks. If an entrepreneur visits a doctor, they are seeking a path to increase productive time. Profit.
How Employees Profit
When I hired in Saigon, I was perplexed by my team productivity. Each Wednesday, the work output sorta just died out. Employees would call in sick after looking perfectly fine the day before.
Why would this happen on Wednesday, when in the US this is the day with the least sick leave?
It turns out many employees would go to a bar each Tuesday, because that night ladies could drink for free (for free!)
As a salaried employee, the only way to profit is to minimize effort and expenses without losing your job.
Why is this?
Generally, your first real job sets a fixed salary for your time, a number that will impact your annual earnings for the rest of your career.
In turn, your productivity also gets fixed: you cannot really do too much or too little without getting fired.
So any smart employee with a fixed salary will adopt a fixed mindset. They will look for ways to minimize effort and expenses.
Should you get smashed on Ladies Night? Not only is it a good idea for you, it signals to your coworkers that they can work slightly less, too.
Should you move 20 minutes further from the office to save $400 each month? Hell yeah thats like a new Xbox every month!
Should you hire a personal shopper to save you time each week? Err thats weird, why would you spend money to make time, you can just shop online when you’re in the office?
Its not that employees actually try to screw their employers; they just do it naturally with this fixed mindset.
Employees adopt a fixed mindset because you give them a fixed contract.
How Freelancers Profit
In my first job out of college, I had the luxury of getting paid per hour. Although I made less overall than some of my peers, keeping to hours enabled me to maintain a growth mindset and a time orientation to profit.
I was able to easily transition to freelancing because I had practiced the freelance mindset as an employee.
If you commit to being a freelancer, the only way to understand profit is in blocks of hours.
Everything you do, everything you buy, should be framed in time. If your hours are billable, then every hour lost to non-billable stuff is an hour lost of profit. Worse, every hour lost is more than an hour lost of profit, because every hour of work for a client generates some percentage of referrals to new clients.
So the easy way to look at profit: calculate your hourly rate after taxes and then l0ok at everything in that frame.
Lets illustrate this. Suppose you charge net $100/hour:
- Your rent of $1,000 per month is a cost of 10 hours
- Your weekly commute of 20 hours per month is a cost of 20 hours
- Your phone bill of $50 per month is a cost of 0.5 hours
- Your 40 hours on Facebook each week is a cost of 40 hours
See the aha here? You can now make intelligent decisions about your lifestyle.
Should you move to a city 20 minutes away where your rent costs $400 less per month?
As an employee, you almost always take that offer; as a freelancer, you compare the 20 hours of commuting to the four billable hours saved and conclude it is a terrible idea.
Should you hire a personal trainer? As an employee, $600 per month is often an expensive luxury.
As a freelancer, it gets more complicated: at 15 hours per month, the real cost is 25 hours of lost work (six for the expense, 15 at the gym, and four in commute.)
And yet, it might still be a great bargain, if you can add more than 25 billable hours to your month because of increased energy.
Some questions get easier.
Should you hire a bookkeeper or keep your own books? Should you shop for your own groceries? Should you upgrade to Business Class for that long haul flight?
All of these can be answered by simply measuring the difference in billable hours vs the hours needed to cover the expense.
Of course, you still need to end the month with cash: some choices will look good on paper but may be constrained by your amount of available cash. You may know that a business class ticket will pay for itself by giving you an entire extra day of productivity, but still accept the cattle class because you simply cannot pay upfront for that productivity.
But, in general, you can plan out your month by comparing your cash expenses to the billable hours you need to cover them. Here’s a basic example:
- Rent: 15 hours
- Food: 6 hours
- Utilities: 2hour
- Phone and internet: 1 hour
- Transportation: 3 hours
- Gym: 1 hour
- Entertainment: 10 hours
- Savings: 5 hours
- Insurance: 5 hours
- Overhead: 20 hours
- Total: 68 hours
So in this scenario you would need to bill 68 hours per month (~16 hours per week) to cover your costs.
Move to NYC and increase your costs 30%? You’ll need about four more billable hours, each week, to justify it.
Move to Thailand and cut your costs in half? You might lose clients, but you’ll only need eight hours per week total to get to even.
Run a Groupon at half your normal rate? You’ll need to bill 32 hours per week to break even.
Double your prices? You’ll only need 8 hours per week to break even.
This mindset shift, where you view your expenses in time blocks rather than cash, allows you to better consider your choices and their downstream impact.
How Entrepreneurs Profit
If a freelancer profits in hours, an entrepreneur profits in days.
The first 1,000 days of a new venture are the most difficult, and profit equals more days of runway.
To profit as an entrepreneur, you either need to shorten the days to viability or lengthen your runway.
This distinction, between hourly mindset and daily mindset, defines the difference between freelancers and entrepreneurs.
A freelancer considers moving to Thailand because she can work five less hours per week; an entrepreneur moves to Thailand to add 200 days of runway.
Should you hire a salesperson? A freelancer considers the time cost, say thirty billable hours each month, and often concludes it is not worth the hassle.
An entrepreneur considers the time cost, 60 days of runway, and may conclude that it is a good investment.
A friend once confided in me that his two new sales hires had only three weeks to cover their expense or they would be laid off. Nothing personal, and a bit sociopathic, but three years later they are still there and so is the business. That is an entrepreneur.
Why the time distinction?
Freelancing is like owning a dog: it is a delightful experience, but you will never leave it alone for more than eight hours and you will always have to pick up its shit.
Entrepreneurship is like raising a child: same shit, but you hope one day it will learn to clean up its own shit, and even take care of yours.
Uber: The Gateway Drug to Entrepreneurship
Back to San Diego. How did that surfer start hustling?
The real value of the sharing economy (Uber, AirBnB, Instacart) is not the warm fuzzy human relationships.
The value is in the shift to the freelancer mindset.
Before the sharing economy, a 9–5 employee had almost zero opportunity to make more money on the side: the only obvious pathway was taking evening classes, often at great expense and with a time horizon of many years.
If you’re making good money 9–5, but you can’t really make more or less proportional to your effort, the only rational thing is to leave the office in time for Happy Hour.
But then the sharing economy happened.
Suddenly those extra few hours in the evening could be monetized. Suddenly your commute could pay for your gas.
Suddenly it was cool to be ambitious.
So now there are millions of former employees starting to see the world through a growth mindset.
Once you’re on this path, it is a relatively small step to shift to the daily mindset over the hourly mindset.
Step 1: freelance until you have a surplus of time and money
Step 2: quickly validate ideas (they can be as simple as T-shirt designs)
Not every new freelancer will make this leap, of course: the sharing economy, while creating this army of freelancers, also wants them to remain freelancers.
But you can.