Economics And Your Practice

Take your cost structure seriously.

Here's a question for you: Why might an oil company drill oil at $90/barrel, even though the average total cost is $100?

Those who are somewhat familiar with economics know that this may happen in real life. The oil company might drill oil at $90/barrel even though their average total cost is $100 in order to keep their marginal cost low. The company gets to keep a higher profit (or reduce losses) by increasing production.

But what does it has to do with consulting?

While most boutique or solo practices keep a lean cost structure, many of you have built your firms just like an oil company: With high fixed costs.

These costs might include full-time employees. Long-term office rent and equipment. Or even your own compensation, if you withdraw a predetermined amount of money from the business every month.

This overhead might be the basis of your competitive advantage, what differentiates your firm from others. But as you build more and more capacity, the pressure to feed it also increases. And now you're tempted to accept any opportunity that comes your way just to keep that machine working.

Increasing fixed costs may be efficient. But it makes saying "no" more and more painful for you. You might see yourself in the same position as an oil company: selling your work for less than what it costs.

This analogy doesn't mean you should charge based on cost. For me, the lesson is that every consultant would benefit from taking your cost structure seriously. And, most importantly, investing some time to at least consider the benefits of staying small.

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