Every person has an implicit hourly rate of value they create, in business and beyond. Determining that number is tough, but if you don't have an estimate — you don't have a framework within which to make decisions. SeatGeek founder Jack Groetzinger explains.
Image remixed from Alex Staroseltsev (Shutterstock)
Let's use a business example to illustrate hourly rate of value. Perhaps Bob, SeatGeek's (fictional) travelling salesman, provides $150 of value for every hour that he's working. If Bob catches the flu and is forced to spend a day hunched over a toilet rather on the road selling, then the DCF of future earnings decreases by $1500.
Once he recovers, suppose Bob has to travel across Manhattan for a meeting. He can get there by taking the subway for a modest $2 or by taking a cab for $27; the latter would save him 30 minutes of time. The frugal bootstrapper in me wants Bob to take the subway, But if he does that, he is effectively stealing $50 from SeatGeek. Bob's decision causes the enterprise value to drop by that amount. If a shareholder owned 2 per cent of the company, she would be $1 poorer after Bob's choice. It's optimal for shareholders if Bob leaves for the meeting half an hour later and spends that time working.
Thinking In Tradeoffs
Once you start thinking like this, your day becomes full of these tradeoffs. Today I had to buy computer for a new employee. I went to Amazon, and immediately found what I was looking for listed at $700. Based on previous experience, I know that Amazon isn't usually the cheapest option for laptops; I estimated that if I spent another 15 minutes diligently searching the web, the expected value of the best price I'd find would be $660. At that moment I was estimating my rate of value creation at over $160/hr, so I bought the Amazon computer and moved on to the next item on my to-do list.
Ideally, if you stop anyone and ask them "at what rate do you value your time right now?" they should respond with a number. Determining that number is really hard, but if you don't have an estimate — no matter how rough — you don't even have a framework within which to make decisions. You're living your life by your gut rather than thinking analytically about how you spend your time. People with a number are Billy Beane; those without are Jim Hendry.
Value Is Constantly Changing
The rate at which you value your time is not static; it's constantly changing. If I'm stuck on a plane with no internet, the rate at which I'm creating value for SeatGeek is low. On the other hand, suppose it's three in the morning and I'm feverishly working on a presentation for a massive client. The presentation will take place in five hours. Here, the rate at which I'm creating value is quite high. If two hours magically disappeared from the clock, it could destroy a meaningful amount of the company's enterprise value. So I feel justified in, say, asking my girlfriend to get me a Diet Coke so that I don't have to break my concentration (thankfully she's an economics student, so she understands).
Value Does Not Equal Wage
The rate at which someone creates value for a company (and thus should value their time, from the perspective of the company) isn't the same as their wage. In theory, calculating the value of someone's time is simple: if Bob went into a trance and didn't work for an hour, how would the company's DCF of earnings change ? The drivers for wage are more complex, but are nicely captured by VORP. In baseball, VORP is a statistic that identifies the incremental value Player A creates vis-à-vis the player that would replace him in the lineup if Player A got injured. If a Player A has low VORP then his team is close to indifferent about keeping him around; he will be paid a relatively low wage.
There are people who create tremendous value but have low VORP. Consider an EMT. The hourly value created by an EMT is enormous; if an EMT went into a trance on the job, she could end a human life. But the market for EMTs is liquid and the difference between the worst EMT that gets hired and the best that can't find a job is small, so they are not particularly well-compensated. It is natural for people to associate the value of their time with their wage, but that urge is best resisted.
One Last Example
Last week, lots of people in the ticket industry headed to the Bellagio in Las Vegas for Ticket Summit, the largest annual ticketing conference. I went for the third year in a row. The past two years I stayed at the Imperial Palace, which seems to consistently be the cheapest place to stay in NV, despite its location in the middle of the Las Vegas Strip. The frugal-no-matter-what part of my brain drove me there.
This year, I changed Palaces; I stayed at Cesar's. My rationale: the hotel is closer to the conference than the Imperial Palace. I will spend an extra $70/night, but that cost will be more than recouped by the time I save walking back and forth. If I were being completely rational I would have just stayed at the Bellagio itself, but the $250/night price tag was more sticker shock than I could bear. I'm getting better at being coldly analytical about how I spend my time, but now and then my inner cheapskate still shines through.
For the author's notes on this article, see the original post here.
Jack Groetzinger is the founder of SeatGeek, which uses analytics and exceptional UX to make buying event tickets a wholly better experience. He posts on Twitter as @JackGretz and on HackerNews as jack7890.
The Value of Time [Jack Groetzinger]