The Prof G Pod with Scott Galloway - Office Hours: Revenue Per Employee, Should I Move Production to Mexico? And Advice to an Early Career 23-year-old

Episode Date: January 25, 2023

Scott answers a question about using metrics like revenue per employee (RPE) to measure the success of a business. He then shares his thoughts with a luxury furniture designer about moving production to Mexico, and ends with advice on prioritizing career opportunities in your 20s. Music: https://www.davidcuttermusic.com / @dcuttermusic Learn more about your ad choices. Visit podcastchoices.com/adchoices

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NMLS 1617539. Welcome to the PropGPots Office Hours. This is the part of the show where we answer your questions about business, big tech, entrepreneurship, and whatever else is on your mind. If you'd like to submit a question, please email a voice recording to officehours at propgmedia.com. Again, that's officehours at propgmedia.com. Again, that's officehoursatpropertymedia.com. First question. Hi, Scott. Ian here from Boston. I really enjoy your podcasts

and your insights into running businesses, evaluating businesses, and also being a good human being, especially being a good father. I run my own business and I often hear you talking about metrics like logo renewal, dollar renewal, ARR, PE ratios. I was wondering where revenue per employee fits into the discussion of businesses, particularly small businesses,

which may not have numbers like PE ratios or ARR numbers to talk about. We'd like to hear your thoughts. Thanks. Thanks for that, Ian from Boston. So all of these metrics are really important. The key is that you have as many as possible to kind of create a snapshot of the company. And they should inform your decisions, but not dictate them. There's a general rule that once a metric becomes the metric that you're studying to, that it loses its importance or it can begin perverting the company. You see this a lot in compensation, where if you have really strange behavior that doesn't make any sense among your employees, look to compensation.

And you're just going to find out, oh, we pay them based on answering a phone call as opposed to handling customer service via email. So everyone drives everyone to a phone or not to the phone, whatever it might be. So average revenue per employee, I think, really works well for small services companies. So I remember thinking, when I started Profit Brand Strategy, I started when I was 26 and I was in business school. And the bogey was McKinsey averaged 550 grand per employee in fees. And I thought, all right, we were at 250 or 300.

I'm like, our dream is to get to 550, to have the kind of pricing power and have the kind of value and have the kind of brand equity where we could charge the type of consulting fees that resulted in an average revenue per employee. So I think the average revenue at places like Pinterest, Twitter, and Snap is five to 800 grand per employee. And at Meta and Google, it's one and a half million, which gives you insight into just what cash volcanoes, Meta and Alphabet sit on top of. So it's an interesting metric. Now, having said that, a place like Amazon that has hired a half a million dollars in fulfillment and those employees are a lot less expensive has a much will have a very large revenue per employee. Here at Prof G, we're going to try and do about $10 million in revenue this year, somewhere between,

call it, $8 and $10 million. And we have about, I don't know, 10 or 12 employees. So that's a lot of revenue per employee. But a lot of that is trading off of existing agreements. I'm valuing some of the equity we're getting from some of our distribution partners. It's a little bit misleading. And we aren't hiring like crazy, hoping to grow ahead of the curve. I did that for a long time. I started companies where I was trying, growth was everything. That was the metric. And in our economy, what's changed over the last 30 years is the primary metric that the market is looking at is year-on-year growth. Now, it drills down one more level when it starts talking about really looking at a company. It starts looking at things like local renewal, dollar renewal, margins. But revenue per employee is another really interesting one. I think it's more

about a services company. I think it's more important in a service company and a private company and a smaller company. But as you become a bigger company, it's more about growth. It's more about the margins, the gross margins, right? You might be losing money, but if you're growing fast and you have big gross margins, eventually those total gross margin dollars will supersede costs and you'll have a good company. But revenue per employee, sure, it's interesting to look at, compare against your peers. Benchmarking is so important because it's not revenue per employee that's insightful. It's revenue per employee at your firm relative to revenue per employee at other firms. No one metric should dictate your position, and every business is different. There are different ways to make money. The gross margins on a pharmaceutical is 97%, and it's a great way to make a living. The gross margins on Amazon are much lower than that. It's also a great way to make money.

So it's all situational, if you will. Thanks for the question. And apologies for kind of the ramble here. Next question. Yo, Scott, this is Dave from Santa Barbara. On one of your podcasts a few weeks ago, you mentioned your time advising luxury brands, which made me think you might have some insight

into something I'm wrestling with. I'm a woodworker and furniture designer and started a small studio in Oakland about 10 years ago. The pieces are handmade to order here in the U.S. by a small team, including myself. So local and ethically made are two key components of the brand identity. I moved my shop down to Santa Barbara this summer and needed to trim the team down to myself and my best builder. Since then, we are quite overworked and I need to grow the team again. But labor and space are so expensive here in California, plus the taxes and benefit requirements are pretty high. It doesn't quite make sense to scale the team up here. So I've been looking at a number of options, but my current favorite is

exploring Mexico as a place to grow the production operation. The scheme is that I'd keep my shop here along with my assistant builder to do one-off pieces as well as design and development of new collections. I'd have the majority of pieces built by a partner in Mexico. I speak fluent Spanish and love being in Latin America, so there are non-business benefits to that option as well. I already found a great resource in Mexico who's ready to help me scout out a partner facility that can produce the quality I require and who treats their workers well. That's very important to me. My question to you is about the brand impact of such a move. Assuming I can meet my needs from a quality and price standpoint, do you think a brand that grew up as mine did can make this transition? Or is the concept of quote unquote made in Mexico so

associated with crappy quality products made by poorly treated people that it would undermine the brand and lead me to lose the clientele I've grown. Realistically, I think moving to production to Mexico is the most ethical move. The best jobs I can sustainably provide here in California barely allow people to eke by while I could create what would be considered a good job to artisans in Mexico. Thanks again from a fellow Cal Bear, throwing that in there for the chance that that'll help you take my question. Cheers. Wow, Dave, that was so impressive. Just the way that you've kind of broken down the analysis.

Quite frankly, you answered your own question better than I could have. I think what you're going through times a million is what the California economy is experiencing. And that is despite what is, in my view, the most beautiful region in the world. The collision of sky, sea, and land in California is just unparalleled. The desert, the ocean, the mountains. But a small business or an artisan,

I would bet just the regulation, the taxation, the costs have made California for a lot of people just unworkable. So I do this prediction stack every year. And one of my predictions for the year 2022, I like to pick a city of the year. And several years ago, I picked Miami. And a few years before that, a lot of the interesting people, a lot of the food, a lot of the economic opportunity you have in the U.S., but at 50 to 60% off California or especially Santa Barbara prices. So, if you have the flexibility to move to Mexico, oh my God, my brother, adios, you know, go with God. I just think you're going to kill it. I don't know about whether you should leave something in Santa Barbara. I think if you already have a business there, the front end, I don't know the extent to which your customers are going to care. I don't think so. I don't think made in Mexico, especially if it's high-end artisanal furniture with the kind

of woodworking it sounds like you're bringing to it, is going to matter at all. I think Mexico has an unbelievable art scene. And if it's clearly cheap and it says made in Mexico, that says one thing. But keep in mind, made in China or made in Japan used to mean it was cheap. So I don't think that's going to hurt you at all. And the fact that you can go down there and build a business and have the economic flexibility and have higher gross margins and not deal with some of the, I'll say I'll say it, overregulation that is cursing California right now. I think you've just answered your own question. I think you've thought this out. And I don't think you need to worry about saying, you know, I'm an artist and working out of Mexico right now. Have a site, you know, show your workshop, show the good people you're giving good jobs to. and I don't think you're going to have any problem at all. And I think you're taking advantage of an incredible lifestyle arbitrage and one of the core competencies of Americans, and that is we leave. We're being persecuted in Europe. We come to the U.S. We don't have a good job in Cleveland. We moved to Las Vegas, whatever it is. And so a young man who has the kind of skills you have and the flexibility, wow, I think you're in a great spot. Mexico is going to boom from this desire to have a more heterogeneous supply chain.

There's going to be a lot of nearshoring, and I think Mexico is going to be the big beneficiary of that. Data from the United States Trade Representative shows that in 2019, trade with Mexico totaled around $256 billion. Mexico-U.S. trade accounted for 14.8% of total U.S. international trade. The Mexican Secretary of the Interior revealed that there were over 450,000 business visitors who entered Mexico from January to November 2022. That has doubled from 2021. This just feels right

as rain, quite frankly. And I hope that you will reach out to us and tell us how it's going in a year. But it sounds like you're living a great life and that you've thought about this and you have skills. Well done, my friend. Enjoy Mexico. We have one quick break before our final question. Stay with us. I just don't get it. Just wish someone could do the research on it. Can we figure this out? Hey, y'all. I'm John Flynn Hill, and I'm hosting a new podcast at Vox called Explain It To Me. Here's how it works. You call our hotline with questions you can't quite answer on your own. We'll investigate and call you back to tell you what we found.

We'll bring you the answers you need every Wednesday starting September 18th. So follow Explain It To Me, presented by Klaviyo. The Capital Ideas Podcast now features a series hosted by Capital Group CEO, Mike Gitlin. Through the words and experiences of investment professionals, you'll discover what differentiates their investment approach, what learnings have shifted their career trajectories, and how do they find their next great idea? Invest 30 minutes in an episode today. Subscribe wherever you get your podcasts. Published by Capital Client Group, Inc. Welcome back. Question number three. Hi, Prog G. My name is Jordan. I'm 23 and a recent university graduate abroad. I studied communications in school and managed to get a marketing internship this past summer

at a private VC investment firm. Now I'm an analyst doing investor relations while still working on some of our content. My question to you is how can I continue to build a strong career in VC with a non-finance background? In my heart, I'm a content marketing person, but I'm trying to follow my skills, which is strategy, relationships, and storytelling. I think if I put my head down and work really hard these next few years, I could put myself in a good position to start my career strong. But I'm also trying to find the time to exercise,

eat healthy, go out, and create my own content. I've listened to a lot of your ideas about not seeking balance in your 20s and following skills versus following your passion. And I'm very much living those ideals out right now. I'm wondering if you can give a little more advice to someone like me who wants to build a great career and life in my early 20s and hopefully a family one day.

Thanks so much. I've said it before and I'll say it again. I'm most appreciative to you, Pravji, because your content and writing is something that my father and I bond over and share. Thank you so much for the time. First off, Jordan, thanks so much for your kind words and especially the last part when you say that you and your dad listen to my stuff.

That's just the nicest compliment anyone could give me. So thank you. So look, you're killing it. The VC, I get so many, so many kids, when I say kids, students, want to be in venture capital or private equity. And this industry is enormous from a capital standpoint, from an influence standpoint, from a relevance standpoint, but it's actually, these are tiny industries in terms of employment. You know, General Catalyst, Sequoia, think of the top venture capital firms in the world. They have hundreds of employees, not thousands. So you've got a great seat. To be a guy your age

at a venture capital firm is a fantastic seat. In terms of understanding the financial end, what you want to do is you want to take a great class you might be able to do online. I don't know if you're in San Francisco or in New York, but take a venture finance class and just know everything about venture capital, know everything about the capital structure of a table. You want to learn about options. You want to learn about essentially venture finance and take an accounting class, take a stats class. But great investors are typically multidimensional, and that is they understand psychology, they understand biology, they understand a variety of different things or storytelling. The most successful venture capitalists don't necessarily come out of finance, but you need to understand some basics.

So bone up on those basics right away if you don't feel confident in them. The only thing you said that I have a little bit of concern around is what sounds like when you say content creator, and that is a side hustle. And I am not a fan of side hustles. I've always said or thought, if you have a side hustle, that probably means your main hustle is not what it should be and you need to focus. The difference between the 200th ranked golfer in the world and the number in the top 10 is like 0.4 strokes per round. And so the difference between someone who's good at your position and someone who really stands out is a few extra hours, some more focus, a few more contacts, a few more original ideas, a few more source deals from you, whatever it might be. And so, yeah, take some time to stay in shape. And that's not a lot.

At your age, a half an hour a day, I do this kind of intense CrossFit thing that takes 30 minutes. I do it four times a week. A guy your age, when he does that, if you eat decently, is still ripped. And you don't even have to eat decently at your age and you're still going to be in decent shape. Try and find some time to try and find relationships, specifically a mate. But I find young people generally find time for that. The only thing that worries me about what you're doing is the side hustle because you've got a great seat and I would be very focused on making the most of that opportunity. In sum, it is great to be Jordan, to be 23 at a VC firm. You must be an impressive young man. Keep some time to have some fun. And if occasionally you have to put your

fitness aside, occasionally if you think this is stressful, if you occasionally think this is really fucking hard, that's exactly where you should be. Thanks for the question, Jordan. And also, thanks again for the kind words. That's all for this episode. Again, if you'd like to submit a question, please email a voice recording to officehoursatpropertymedia.com. Our producers are Caroline Shagrin and Drew Burrows. Thank you. Hey, it's Scott Galloway, and on our podcast, Pivot, we are bringing you a special series about the basics of artificial intelligence. We're answering all your questions.

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