Can you even make a $1,000,000?

_{[Read time: 4 minutes]}

Serious question:

Do you actually know the maximum your business model can generate?

Now you know me…I’m all about profit, but you don’t get profit without revenue first.

Unfortunately, many business models generate far less than the owners realize. They often work tirelessly to reach revenue targets that may be unattainable within their business model.

Let’s go through a quick exercise to determine your maximum revenue using 3 common pricing models (so you're well-equipped for your growth targets).

1. Hourly Rate

This one is pretty straightforward.

Multiply the hourly rate by the number of revenue-generating hours you (or your team) can realistically work in a year.

Weeks x hours x rate

Here’s an example:

• Co-founder A → 25 revenue-generating hours/week

• Co-founder B → 30 revenue-generating hours/week

• Rate → $100/hour

This means the maximum revenue these co-founders can earn is $275,000.

50 weeks × 55 hours × $100 = $275,000 (max)

If these two co-founders are deadset on grinding their way to the “$1,000,000 mark,” they are delusional. They will need to change their business model to hit that number.

Here are 2 ways to break the max:

• Increase hourly rate (which might affect customer buying habits)

• Increase the number of revenue-generating hours (which could squeeze business development time or require them to hire more people)

A final point: No matter how badly you want to say 100% of your work is revenue-generating, it’s impossible. Time will always be invested in business development and administrative tasks to keep a business growing.

2. Project-Based (Fixed Price)

If your service is dialed in (you’ve pretty much productized your service to where every project is the same), this is straightforward.

If your service is a bit customized or ad-hoc, you’ll need to use average-based assumptions.

That said, it is still easy to calculate.

Multiply the average fixed price of a project by the number of projects you can complete in a year (factoring in average project length).

Price x (total weeks in year / average project length)

Here’s an example:

• Solo business owner (does everything)

• Average project length → 2 weeks

• Project price → $12,000

This means the maximum revenue they can earn is $300,000.

$12,000 × (50 weeks / 2-week project length) = $300,000 (max)

Here are 3 ways to break the max:

• Increase price (which might affect customer conversions)

• Shorten the project cycle (try to make it more efficient without sacrificing quality)

• Add more people to carry out the project (which changes the dynamic of the business)

A word of advice: Factor possible delays into your formula because projects rely on other people's schedules…and you have little control over other people’s schedules.

3. Performance-Based

This is my favorite. I call it the magic money machine framework.

There are many, many variables here, but it’s always centered around a core performance metric. Some examples are:

• revenue generated above a threshold

• new customers or leads

• profit growth

Multiply the performance rate by the performance metric and then by the number of companies under the agreement.

Rate x metric x how many performance agreements (in a single year)

Here’s an example:

• Metric → Revenue growth above $100,000

• Rate → 11.0% of every revenue dollar earned above the metric

• Agreements → 3 companies

• Illustrative results of revenue generated:

  • Company A → $600,000

  • Company B → $750,000

  • Company C → $500,000

This means the maximum revenue they can earn is $170,500.

• 11.0% × ($600,000 − $100,000) = $55,000

• 11.0% × ($750,000 − $100,000) = $71,500

• 11.0% × ($500,000 − $100,000) = $44,000

Put it together:

$55,000 + $71,500 + $44,000 = $170,500 (max)

Here are 2 ways to break the max:

• Change the performance metric

• Be world-class executor and nail those results

That said, you can see how quickly this performance-based model can change depending on the variables.

(Plus, I love how creative you can actually get with performance-based pricing)

I have to mention digital products (as a supplement)

This post is focused on the core business model, so I don’t want to go off the rails talking about digital products (but I will acknowledge them).

What I mean here are ebooks, online courses, templates, etc., that you “make once, sell many.”

While these products could theoretically generate an infinite source of revenue relative to time, they often supplement and lead to core services.

If you must walk away with one thing, this is it:

Knowing what your business model can handle makes "growth" tangible. If your business model cannot meet your goals, something needs to change — your goals or the model itself.

The real risk lies in not knowing and wasting resources trying to achieve the impossible.

That’s it for this week. Thank you for reading.

— Peter