Profit 101 Video #14: Pursuit of Profit Margins - Cost Savings

Why does fractional hiring enable such large cost savings? That's the question. In pursuit of 50% margins, you need to cut or manage costs wherever possible. When comparing full-time employment to a fractional approach, there are several differences. In the fractional method, you might have someone who acts as a long-term contractor, sometimes even spanning several years. We've seen instances where contractors have remained for 8-10 years, which is longer than many full-time employees stay.

From a cost perspective, what savings do you see with the fractional model?

1. 1. Payroll Taxes: In the fractional approach, this is an expense you can typically sidestep. If the person already has a W2 income, this engagement is seen as a sideline, not their primary source of income. This results in savings of 7.65% just from the employer side of payroll taxes.
2. 2. Benefits: This is a significant cost for employers. Depending on the organization, the costs can range from 5 to 10%. A primary contributor to this cost is healthcare.
3. 3. Bonuses and Raises: These additional costs can range from 5 to 10%. This category can include vacation and other benefits.
4. 4. Equity: This is not about giving away 5 to 10% of the company, but the value of the equity relative to the person's salary. This can range from 5 to 10%, and sometimes even more.
5. 5. Discount on Salary: From our experience, many professionals, like developers, are willing to accept a discounted rate for fractional work, especially if it offers flexibility and the potential for a long-term relationship. It's not uncommon for this discount to range between 10% and 20%.

When you combine all these factors, the savings can be substantial. While not all these factors are purely additive, when summed, they can range from about 33% to 50%. From our practical experience, we've found that the actual realized savings can be around 40%, as observed at HiddenLevers. These cost savings were a significant driver for HiddenLevers' margins, and it's a primary reason why I strongly advocate for the fractional hiring model.

Next up, de-risking.

More Posts from the Profit 101 Series

Business Principles

• Profit 101 Intro
• How to Start
• Year 1 - Quit or go All In
• Minimum Viable Revenue
• Fail Fast
• Total Addressable Market (TAM)
• Pricing & Unit Economics
• Not all Cofounders Are Created Equal
• Not all Revenue is Created Equal

Startup Costs Video Series

• Software
• Marketing

Pursuit of Profits

• How to get 50% Profit Margins, Part 1 Video
• How to get 50% Profit Margins, Part 2 Video
• Pursuit of Profit Margins Video - Fractional Hiring
• Pursuit of Profit Margins Video - Cost Savings
• Pursuit of Profit Margins Video - De-risking