Passive Income Stream Valuation Methodology–Part I: How Much Is Your Time Worth?

July 24th, 2008 · No Comments

You can\'t know if something's worth your time if you don\'t know what your time is worth.

You can\’t know if something’s worth your time if you don\’t know what your time is worth.

The first step in figuring out what business ventures are worth your time is to figure out what your time is worth. Shockingly most people never bother to figure out this question. The closest they come is when they’re considering a new job and they do a very subjective comparison of their current opportunity and the new one.

(NOTE: This is a worthwhile exercise even if you have no entrepreneurial goals. If you are being offered a new job, you need to be able to assess how the two jobs really compare. If a new job pays 10% more but is 50% more work, it may not be the good deal it appears to be on paper. This value will also be pivotal in helping us figure out what ventures may be worth your time.)

The first step in becoming any kind of entrepreneur is to stop thinking linearly about your ‘job’ and start thinking about yourself as “You Inc.” Regardless of whether you work for someone else or work for yourself is really just a question of where you’re budgeting your operating capacity. If you are a salaried employee, then you are basically just committing “You Inc.” to a contract that states you will expend a certain amount of effort in return for certain compensation. The goal is to figure out if we should keep renewing that contract.

You would think that this would be easier for an hourly employee than a salaried employee but the process is roughly the same. We need to figure out how many hours per week we spend doing things other people want us to do. Lets take an average week for an hourly employee:

  • 40 Hours of work @ $9 per hour
  • 5 Hours of commute (unpaid)

Total: 45 hours for $360 = $8 per hour.

For a salaried employee it’s usually easier to do it yearly, but it’s good to keep in mind how many hours you REALLY work. Many of us work more or less than the 40 hours of work that would be used for this calculation:

  • 2150 Hours of work at $48,000 per year.
  • 5 Hours of commute per week x 50 weeks a year = 250 hours

Total: 2400 Hours of “work” for $48,000 = $20 per hour.

Be honest with yourself about how many hours you work. If you travel one week out of the month, think about how many hours you really work when traveling. Oftentimes it’s much more than you would work in a week at the office. Also consider weekends worked or if your average day is more than 8 hours per day.

It’s also important in these numbers to take “benefits” into account. However don’t take into account your workplace’s assessment of what the benefits are worth; decide for yourself what they are worth. They may be costing your employer much more than they’re worth to you. For example, if I am a single man with no children, then probably the only ‘benefits’ that are really worth anything to me are the health insurance and 401(k) match. So basically I should add to my salary the maximum match the company will give me and the cost of replacing the health insurance.

Next you need to consider your tax bracket. If the government is taking 40% of everything you make, you need to take that off the top. If I’m making $20 per hour but I pay 35% in taxes, then an hour that I work is yielding about $13 to my bottom line. This is the number we want to work with for comparative purposes.

You can use our Passive Stream Calculator to help you do the math and come up with some basic assumptions.

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How Google’s PageRank Works

July 23rd, 2008 · No Comments

The first thing we need to understand in order to have a clue in creating value on the Internet is the idea of Google’s PageRank system. While in the not too distant past it might have seemed somewhat of an overstatement to say that Google’s assessment of your worth is one of the defining characteristics of Internet value, I think by this time its become quite clear. If you show up as the first link on Google’s search you’re going to get vastly more traffic than the second and the second will get vastly more than the third. You don’t even want to consider the drop-off after you get off the first page.

We don\'t want to anger the Google.

We don\'t want to anger the Google.

To understand why this value is self-promoting and intrinsically interesting we need to discuss how PageRank works. There is an excellent explanation on eFactory, a German site which as is so common for foreigners has a better grasp of English than most Americans. It is also a very detailed and erudite explanation. I warn you there is a lot of math and theory that you may find boring unless you are at least somewhat as nerdy as I, additionally it is almost completely unnecessary to understand for any practical purpose.

A basic summary of this is that Google views the Internet as a digraph. The connection between each node of the graph is a link between them. So if my page links to your page, our nodes on the graph would be connected. Now each node confers onto each other node it links to a value based on its own value. So if my site has a good Google PageRank and I link to your site, I confer some of my pagerankiness onto you. Thus the recursive nature of this system promotes its own value. I can use my high PageRank to make other people’s PageRank high, so this rank adds value to my site.

So if I’m viewing this as real estate, any increase in my neighbors (the documents that link to me), leads to an increase in my value. Similarly any increase in my value leads to my neighbor’s good fortune. Bear in mind however that this value has NOTHING to do with page views. I could literally have a site that NOONE visits, but is linked to by many high PageRank pages. My PageRank would be very high, despite the fact that no one ever looks at my page.

The eFactory discussion makes this point and I think it is very much worth noting:

It is often argued that, especially considering the dynamic of the internet, too much time has passed since the scientific work on PageRank, as that it still could be the basis for the ranking methods of the Google search engine.

There are two interesting points related to this. One is that despite the fact that you can create this value there is an ephemeral nature to it. If Google decides to change their algorithm for search engine optimization tomorrow all sorts of chaos might ensue. Secondly this very chaos probably discourages them from doing so. Once they’ve significantly changed it once, people will be less inclined to assign it the weight they currently do.

It is also noteworthy as mentioned in the eFactory article that Google retains the ability to punish people for abusing their system by assigning them a PageRank of 0. Thus even if you are linked to by quality inbound links, you would have no value as an outbound link and would show up last on their pages. While we have our suspicions that this is rarely used, especially in less than egregious cases, we also consider it wise to follow Google’s recommended practices and pursue the spirit of their system as opposed to trying to abuse it. This makes it unlikely that we will see the horrors of a huge drop in value based on external factors.

We were curious as to how often the PageRanks are updated. While we found plenty of people speaking authoritatively on the subject, we found their remarks less than credible. There appears to be a PageRank export that comes out periodically which affects the output shown on the Google Toolbar, but I see no reason to believe that coincides with any frequency in their actual updates. My guess would be they are updated more or less constantly. I think the question is probably not regimented in the first place and the result of other factors like when it spiders pages.

When you look at websites for sale today, one of the key statistics always listed is their Google PageRank. If that number were to suddenly become meaningless it would have a dramatic effect on the value of Internet Real Estate. As such we consider it fairly likely that it will at least remain a component of Google’s method of ranking web pages. As such we see it as a valid way to create value to attempt to optimize PageRank on our properties as well as numbers of views. There is of course a synergy to these two tasks, but they can be pursued in a variety of different ways.

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Affiliate Programs

July 22nd, 2008 · No Comments

If you don’t know what an affiliate program is, it’s a simple way for people to basically make a commission on traffic they refer to a seller. The most common example is Basically you sign up as an Amazon affiliate and you get a special code that you can put on your links to them. Then any time that someone clicks on that link and buys something there, you get a (small) percentage.

For various reasons a lot of people have negative attitudes about affiliate programs. Many people feel that you somehow invalidate your reviews or endorsements by getting paid for your link. We generally feel that’s a preposterous attitude. If we’re going to review a book, we’re going to put a link to it somewhere. If we’re going to put a link I might as well get a commission.

Affiliate programs have two great advantages for online businesses:

  • Affiliate programs do not require that the site be a known commodity. While very few people are going to buy advertising from a brand new site, they have nothing to lose with you as an affiliate.
  • Affiliate programs are not mutually exclusive with advertising, in fact they are often times complimentary. Whereas you can only have a few ads on your site before you start to look like a spam-site, affiliate links are generally placed in context and can provide another income stream in addition to advertising.

Downsides of affiliate programs include:

  • You don’t get paid if they don’t buy in a timely fashion. So if your reader likes your review and decides to buy the product, but buys it from a local retailer, you get nothing. Also there is usually a time limit, which can be fairly short, after which you don’t get paid for your referral.
  • Even if you generate a good deal of income it is often unpredictable and inconsistent.

At Protoscopic we will only give unbiased reviews and endorsements of products with which we have experience. Because of this we think affiliate programs are not only legitimate but a reasonable way for our readers to help us keep improving our blog. If you are interested in the products we endorse, we appreciate you using our affiliate links.

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