I Made $1,486.70 an Hour Last Year
So I read Search Engine Myths Exposed yesterday. (If you’re involved in Internet marketing at all, I’m sure you saw at least one person pushing it.) It was free, and since getting good at SEO is what started my journey, I figured I’d give it a look and see what “expert” advice this “guru” was giving.
The first thing I found was that he definitely has the Internet Marketing Hype Meter turned all the way up to 11 — as much as any other site I’ve ever seen. That made me even more confident that, despite claims to reveal the “truth” of what we “should really be doing” doing to rank well in Google, this was going to be a complete waste of time.
However, after wading through everything and finally downloading the e-book, I was surprised to find something that actually was well worth reading. Not only does he take on 7 genuine “truths” that you hear regularly about Google, he does a great job of debunking them with real evidence. I don’t agree with everything he says, but all in all this is a great resource and I definitely recommend it. (Which is one reason I hate seeing it wrapped in all the stereotypical Internet Marketing trappings. I think he’s keeping himself out of a much bigger market that way.)
The myths he proves wrong, though, weren’t the only thing interesting to me. Instead, what really stuck with me was the section where he gave lots of stats about a niche site he had built, gotten ranked in Google, and started generating AdSense revenue all in just a matter of a few months.
What caught my eye specifically was how proud he was that this site earned him $152.36 in December — so proud in fact that he highlighted it in yellow so you wouldn’t miss it.
$150? Seriously? You’d have to do 20 of those sites to be making any real revenue, and even then very few of us could quit our day jobs on that. I wasn’t impressed.
As so often happens, though, I started wondering if I was underestimating just how impressive that was. After all, it only took him 5 hours to build that site, and it generated him $372.50 in 2007. That’s $74.50/hour, and I bet there are lots of people who would be willing to work all day long for that. That’s good money.
Alright, so maybe I was wrong. It was sounding like he might be on to something after all.
So my next thought was, “I wonder how much I made per hour last year.” I knew 2007 had been a great year, but I had never sat down to actually calculate how much I earned as a function of how many hours I worked.
I have a variety of revenue sources, making it hard to pull one total number, so I just pulled one of last year’s best-performing sites and used the stats from it. It’s a site that I actually own only a fraction of, but I figured it still would be a good site to compare to the one in the e-book.
First, I had to figure out how many hours I worked on the site. I’m always hopping back and forth between a variety of projects so it’s impossible to get an exact number, but I ballparked it at about 40 hours/month or 480 hours for the year.
Next, I had to add up my share of the profits for the year. That came to $53,615.01 or $111.70/hour — more than the site in the e-book, but then my profit was for the entire year and his was only for August through December. Had his site been live all year, that obviously would have raised his effective hourly rate quite a bit and almost certainly put it above mine.
There was a much greater source of earnings that we had not yet factored in, though.
The Missing Component
As I alluded to in the blueprint, your greatest value comes not from your monthly profits, but from the equity that you build up in the business. That’s because for every dollar that you add in monthly profit, the value of the business increases by some multiple of that. In other words, if you add $100 to your bottom line, you’re not only earning an extra $100 every month, but the value of the business has risen by several times that.
And that’s where financial independence comes from. You can either save up your profits until you have enough where you can live off of the interest that your savings are generating, or you can focus on building equity in your business and unlock it all at once by selling the site somewhere down the line. The first method will take 10 years or more depending on how disciplined you are (often much more), but the second only takes a fraction of that.
The other thing to remember, though, is that different types of businesses have much different multiples. Innophos Holdings, for example, has a price-to-earnings ratio of 12,320. In other words, investors are willing to pay more than 12,000 times Innophos’ profit. I didn’t look to see why, but suffice it to say that you and I will never anywhere near that sort of multiple π
(It would probably be helpful here to take a look at How to: Build an Affiliate Site You Can Sell for $1M, if you haven’t seen it already, for a more in-depth discussion as to why multiples vary so widely.)
The Actual Hourly Rates
So to calculate the actual effective hourly rates, we have to factor in not only how much profit was generated, but also how much the value of the business increased.
Let’s assume a generous 2X yearly earnings valuation for the site in the e-book. (I think it would be closer to 6 or 12 months, and I’m not sure how many people would be willing to even buy a site that only makes $150/month, but 2X will still give us a good number to compare to.) Let’s also give him credit for a full year’s worth of $150 months rather than just a partial year.
That would put his annual earnings at $1,800 (12 months X $150/month) and the value of his site increased by $3,600 (2 X $1,800). That means he earned an effective rate of $1,080/hour ($5,400 / 5 hours) — much different than the $74.50/hour we calculated previously, and very much a worthwhile effort.
How about my site? Well my share of the profits, as we’ve already seen, was $53,615.01. However, we know already that we’re looking at at least a 10X multiple when we sell our site. Using that multiple, my share of the increase in value of the site was $1,320,000, for an effective hourly rate of $1,486.70 — 38% higher than his.
What’s the Point?
Looking at those two numbers, it probably seems like we’re arguing about the difference between a Ferrari and a Maserati doesn’t it? Wouldn’t you be plenty happy with either one?
I would π
What I want you to see is this, though: the vast majority of your earnings aren’t unlocked until you sell the site. He earned $1,080/hour only if he manages to sell what he built. Otherwise, he only earned $360/hour. That’s a huge difference. It’s like buying a Ferrari for your grandmother to drive back and forth to church on Sunday — you’re wasting so much of the value.
We need to be focused just as much on our liquidity event (the point at which all our equity gets turned into cash) as we are on monthly profits.
Said another way: if you’re not building a site that someone else will buy somewhere down the road for a really good multiple, you’re just stealing money from yourself.
I think it’s a great idea to start out with sites like the one in the e-book just to get a feel for everything and to get your feet under you, but that’s only the beginning. The real value lies in taking what you’ve learned there and focusing it on just a few high-multiple sites that you can eventually sell to a larger company. That’s where the real money is.