Three Broken Freelancing Business Models (is this your business?)
A few months ago I wrote about why I love freelancing and how it can create an amazingly free life. Because when you do a few things right, I can't think of a faster path to living life on your terms.
But not every freelancing business model make sense, and the ones that we tend to "fall into" are actually VERY broken.
And getting trapped in one of these broken models sucks a lot.
The money is never quite enough, the hours are long, the clients are hard to find, and things never quite seem to work out the way that they are supposed to.
I was there for far too long. My health suffered. My relationships suffered. My finances suffered. And I know I'm not the only one because I have an inbox folder full of replies from freelancers who fell into the same traps.
So today I'm laying out three badly broken freelancing/consulting/whatever-you-want-call-it business models. Models that seem seductive on paper, but end up generating very poor returns on your time and effort.
Broken Freelancing Model #1: Solo Freelancer or Small Team Providing an Insanely Large Menu of Services
How to Spot It
A solo freelancer or small team attempts to provide numerous related services, because more is better right?
Website designers are notoriously guilty of this. I have lost count of the number of website providers offering me branding, SEO, pay-per-click, social media management, copywriting, a choice of 3 different content management systems, and even print(!) design.
But falling into this broken model can be less obvious as well, such as a photographer offering family portraits, weddings, and corporate photography.
Why It’s Broken
The danger of this model lies in how logical it sounds. Why not offer complimentary services to businesses who are already your clients? Doesn’t every other business book ever written preach this exact idea?
The trouble is that branching out your service offerings is almost inevitably harder and riskier than doubling down on what’s already working.
Consider what offering a new service actually involves:
Figuring out a consistent process for providing the service.
Figuring out how to sell the service.
Figuring out how to price and bill the service.
Figuring out how to ensure quality control.
Finding a reputable contractor or employee to actually provide the service OR finding the time to do it yourself.
Staying on top of new developments in this field because nothing stands still.
That's a crazy amount of work, and a crazy amount of complexity added to your business, for a service that may or may not ended up selling anywhere near as well as what you already offer.
Contrast this to "doubling down". How much further along will you be if you take your existing services and...
Sell more to your existing clients?
Find new clients to sell to?
Raise your rates?
The thing is, a small consultancy will never saturate the market, so there is always room to sell more of what you already provide.
A web agency won’t run out of companies that need websites. A pay-per-click manager will not run out of companies that need ad management. A copywriter will never run out of sales pages to write. And a wedding photographer will never run out of weddings to photograph.
It’s no surprise that so many episodes of Gordon Ramsay’s Kitchen Nightmares involve simplifying the restaurant’s menu. More stuff means less focus and for a small business, lack of focus kills sales.
Trust me, I’ve been there.
Use the time saved by avoiding the disastrous boondoggle of adding services to double down hard on what’s already working. Or if you're already in the trap of too many services, immediately discontinue the ones that sell marginally or not at all.
Adding services is often an attempt to cure not earning enough. Instead of this reflexive action, take the time to figure out why your not earning enough and work to solve the underlying reasons. Layering additional services and complexity on top of a broken model will not end well.
And if you’re nodding your head in agreement but think your service is so great that you will offer it anyway...
Here is my criteria for adding a new service to my agency. A new service is worth considering if and only if it:
Will significantly expand sales to existing clients.
Will at least double the money you make.
Does not require finding and attracting a new audience.
Will significantly enhance the value that your clients receive from your existing services. 2+2 should equal 5.
Most of your ideas will not pass this criteria. And that’s the whole point - new services are rarely the path of least resistance.
Broken Freelancing Model #2: Counting on Small Maintenance Fees to Substantially Replace Project-Based Work
How to Spot It
You sell a website, or an app, or some other project-based work that results in a nice juicy cheque once the work is completed.
But you’re a clever devil who has read about the importance of recurring revenue from your clients. So you decide to charge a small (10% of original project) yearly fee for basic maintenance, such as content management system upgrades.
The hope is that eventually you will be earning so much in recurring fees that you won’t really need to take on new clients, right? Nope.
Why It’s Broken
No matter how many clients you take on, small maintenance fees just never add up to significant money compared to new projects. They are definitely a nice bonus, but they will not create a business that can just live off of these fees indefinitely.
Some quick math illustrates why:
Let’s assume that you sell websites priced at $10,000 and then bill $1,000/year for basic website maintenance (10% of the website cost).
To reach a mere $75,000/year in recurring maintenance fees you will need to sell a whopping $750,000 in website projects (that’s 75 clients by the way).
Holy bananas that’s a lot of websites to build.
Intimidated? That’s not even the whole story...
Let’s assume that the average client will pay you maintenance fees for 3 years before they move on to another provider, go out of business, etc. This means that just to maintain this $75,000/year recurring income, you have to sell another $750,000 of websites every 3 years to fully replace these clients. That’s $250,000 in new website projects each year.
In other words, small maintenance fees can be a nice bonus, a delicious icing on a project-based cake. But they can't replace project-based work because as soon as the projects dry up, the maintenance fees will churn out and disappear quite quickly.
Trust me, I’ve been there.
Finding and qualifying new clients is incredibly expensive, so selling to your existing clients is a Very Good Thing. But why settle for collecting recurring revenue crumbs after the big project feast?
Challenge yourself to flip this around. How can you sell so much services to the client after that first project, that the first project will seem tiny in comparison?
When you can do that, the math changes dramatically. Suddenly you don't have to continuously find new clients. In fact you can start getting ridiculously picky about which clients you do take on because your existing client relationships are growing instead of shrinking.
When I complete a website project for a client, that is just the beginning of a relationship that will grow 5-10x in size over the next few years. Yes that means $10,000 to $20,000 projects turning into six figures in work.
Broken Freelancing Model #3: The "Consulting No Man’s Land" of Relatively Inexpensive, Highly Custom Services
How to Spot It
This is a really dangerous combination of two things: custom work and relatively inexpensive services.
Highly custom means that the result that you are delivering for each client is highly specific to their requirements. Which in turn means you probably had to spend a fair bit of time coming up with a custom proposal that is suited to this problem, even if the budget is small.
Relatively inexpensive means that you need a fair number of these projects in order to meet your yearly income goals. More than 5 to 10 new projects per year.
Almost any type of custom service can risk falling in this category: complex websites, marketing campaigns, video shoots, virtually any form of graphic design, and so on. If the work is largely custom, and you need more than 5 to 10 clients per year, you've probably wandered into this broken model.
Why It’s Broken
I call this the "Consulting No Man’s Land" because it’s a dead space in the middle of two business models that do work:
Providing Highly Custom Work to a Low Volume of Clients
This tends to mean very few clients per year, a scope of work that is highly custom to solving this specific client’s problem, and fairly high budget projects. This model works because the low volume of clients and high price point allows you to devote heavy amounts of time to each client. For example $40,000+ custom ecommerce websites.
Providing a Productized Service to a Higher Volume of Clients
This tends to mean a higher volume of clients receiving a scope of work that is very similar from client to client. The efficiencies that this creates makes it possible to charge a relatively lower price point and to service a higher client volume. For example selling template-based websites to sports teams.
See the problem?
The “consulting no man’s land” combines highly custom, time-consuming services with needing high client volume to succeed. It's the worst of both worlds: you aren’t earning the high rates that come with higher value custom services, but you aren’t benefiting from a highly productized model.
The result is diseconomies of scale, where your costs actually increase as your client volume increases (compared to traditional economies of scale, where volume decreases costs).
Allow me to illustrate this problem with the $5,000 highly custom website. This was my own disastrous business model before I finally crunched the math (after more years than I care to admit).
Let’s assume that your goals are to earn a relatively modest $100,000 pre-tax per year and that you magically have no business expenses:
- That requires finding, selling to, and building websites for 20 clients per year. That’s an average of 1 website every 2.5 weeks.
- Earning 20 clients means writing somewhere around 60 custom proposals (1 in 3 close rate).
- Writing 60 proposals means at least 60 meetings to understand project requirements. Of course some prospective clients are a poor fit and some require multiple meetings so let’s round this up to an even 100.
- Assuming 252 business days in a year (going off Google’s results), that’s a meeting every 2.5 days.
Of course in-between meeting with prospects every 2.5 days and cranking out a custom website every 6 weeks, you have to manage each project and build out a marketing system capable of generating an absolute minimum of 100 quality leads per year.
If that’s not a recipe for 80 hour work weeks and failure, I have no idea what is.
“But Matt, I plan to hire people and scale this out and make it up on volume!”
That’s where those pesky diseconomies of scale come in.
Highly custom work is notoriously expensive to scale. Not only do you gain very few efficiencies from cranking out lots of it (because it is custom), but you start adding overhead that doesn’t really exist in smaller volume. Larger volumes of clients start becoming exponentially more difficult to manage. Marketing becomes more sophisticated. Development teams now need their own managers.
The net effect? If your highly custom service didn’t generate a really “profitable” hourly rate to begin with, scaling it up will only lead to a bigger business that is still barely profitable.
Trust me, I’ve been there. *cringe*
The alternative to sitting around in consulting no man’s land is to pick a damn side and move over already:
Alternative #1: Embrace Custom Work, Dramatically Increase Your Prices, and Find the Clients that Will Pay
If you are providing highly custom work your path to scaling is to charge dramatically higher rates for clients that are more than happy to pay. These aren’t just any clients, they are the ones that are going to receive massive value from your services.
I wrote a guide on this and it’s the model that my own little agency takes.
Alternative #2: Embrace High Volume and Productize Your Services
The other side of the coin is to provide a very similar result for a relatively larger amount of clients. This creates economies of scale since you can systematize the sales and delivery of the service far more so than a highly custom solution.
For example rather than building highly custom websites for very different clients, you can provide websites for specific niches such as restaurants, tourism, coaches, podcasters, etc. Each of these groups consists of business owners that are likely to have very similar requirements, making it relatively easily to keep delivering similar websites over and over. This interview with Brian Casel shows how he did it.
Does Your Freelancing Business Fall Into One of These Broken Models?
There is hope. These broken models are the sirens' song of consulting, difficult to resist but leading to disaster if you get lured in (I should know, I’ve tried all three!).
But these broken models are rooted in the same surmountable challenges: knowing how to find high paying clients, and charging what you’re worth when you do. If that sounds like you then a great place to start is the Freelance Transformation Guide to Finding Higher Paying Clients.
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