The Economics of Mentoring
I’m sharing the inner workings of my mentoring business so far.
A month ago I published a post about my new career choice, explaining what is it I want to do. Now is a great time to look back and share the how of my business. I want to be very transparent here, both to gain trust, and to share information that can help others. I wish I had a similar benchmark when I started, so if this can help fellow consultants/mentors/coaches, I’m in!
Who do you pitch to?
Being self-employed, I chose to play both the role of an investor and a founder. As the founder, I am pitching a valuable business idea. As the investor, I’m analyzing the viability, and decide whether to invest. A nice trick here is to treat ‘time’ as the currency of investment. The founder in me wants to use time to fulfill their idea. The investor in me validates the proposed plan as a worth-while use of time.
Getting ready to switch careers, I had my share of doubts. What if this doesn’t work? I needed to prepare a good pitch, something that the investor in me will appreciate.
Coming up with a plan
I chose an hourly fee for my services at this stage. It is easy to explain and manage, and it will teach me the most about the actual value I provide to my clients. I’m thinking in terms of ‘meetings’ or ‘hours’ as my currency, trying to build a model that works.
What is my work capacity? There’s an easy 100% overhead when you consider commute and a proper lunch break. That is, a meeting of 1 hour requires 1 more hour of ‘padding’. So 3 one-hour meetings equal 6 hours of work, 4 become 8 hours of work, etc.
I decided to aim for up to 3 one-hour meetings per day, 15 per week. As a company of one, my personal time is the currency of work and value. It is very strict — there won’t be any more people in my company, just as there won’t be any more hours in a day. So it makes a perfect ‘first order’ decision, from which everything else follows.
How many clients can I have?
In my mentoring business I want to help people focus on their strategic impact. This means that meeting several times per week doesn’t really make sense. There is a lot of day-to-day work for a VP Engineering to handle, and my impact is on a longer term scale. For my business, this means many clients with low frequency engagements with each. I’m making another assumption, saying that my average client will meet with me once every two weeks. Together with the assumption of 15 meetings per week, my virtual peak capacity is 30 clients. This is an unattainable limit, as even if I were to reach it, I would end up not investing in future clients. But it gives a strong sense of my ‘business throughput’.
I also want to estimate the length of engagement I will be having with an average client. It is unreasonable to assume I will ‘ride into the sunset’ with each of my clients . Their needs will change over time, impacting my relevance. I will feel underwhelmed if I cannot hold a client for 3 months. I will feel very fortunate for every client I work with for a year straight. Going on with my hunches, I’m estimating the average client engagement to last 6 months.
Recapping these hunch-based numbers:
- I want to have up to 15 hours of meetings per week
- an average client would need an hour of my time every two weeks
- an average client would retain me for 6 months before they move on
What is my current gross margin?
The next thing I want to pinpoint is the ratio between billable time and the cost of doing business. The billable time is spent providing value to existing clients. The cost of doing business allows me to acquire new clients. As clients are expected to churn at a certain rate, I already have a good way to test the viability of my business model.
This is a great time to dive into my actual numbers, which I’ll share here with great pleasure. During the past 2 months I have engaged with 45 potential leads, and acquired 9 clients. A nice round number emerges right here — it takes me about 5 meetings to acquire a client.
My gross margin is evident from these two numbers — 5 meetings to secure a client, 12 meetings to work with them. 12 out of 17 is 70% efficiency! This is a good ratio to begin with, but what would it take to get to 80%? One way is to aim for 20 meetings with an average client. Another would be to reduce the customer acquisition cost to 3 meetings. I’ll aim for the second approach, expecting my existing clients to do some word-of-mouth for me.
How many clients should I have?
I will be engaging with clients for 70% of my work-time, which is 42 meetings per month. At 2 meetings per month per client, this means 21 clients in parallel. This is more reasonable than the virtual peak of 30 clients, which I had at the start. But it still feels a bit too much. With the 9 clients I have today, and the time I invest in them, I find it hard to believe I’ll be able to sustain twice as many.
Across my more mature clients, the average monthly engagement stands at 3.2 hours per month. At 42 meetings per month dedicated to clients, I will be at capacity with 13 clients total. This feels much more relatable, and makes me realize I have only 4 more clients to onboard for now!
A big assumption in this model is the client lifespan. I expect to get some data on this later in the year. But for the time being, I will operate on the assumptions above, and check in with my model every now and then.
A few takeaway points:
- Being self-employed, you are a company of one. Your main asset is your time, and you earn with it.
- Your time is a very constrained resource, which is great for a focused business plan. Pitch for time from yourself as an investor.
- Make very few, very core assumptions. Adjust them as you go to evolve your business plan.
- Consider time spent earning money and time spent acquiring new business. One needs to justify the other.
The founder and the investor in my head shake hands on this plan. They agree on a monthly board meeting to review up-to-date metrics and adjust the plan.
Hope you found this insightful, consider following me on Twitter to learn how my business evolves.