At conferences and meetings with other freelancers, a common desire I hear is to shift more of their revenue from “trade-time-for-money” services to “mailbox-money / scalable” products.
As a successful service provider with no plans to shift business models, I’d like to explain my reasoning and start a discussion. I’m not criticizing those who choose to make this shift – there’s many successful people I know who have, and I’ll highlight a few of them below. But I feel like everyone knows the reasons for making the shift and not many of the reasons for not making the shift.
There’s more than two business models
You can never be rich trading your time for money. You need to shift to selling products, so increases in revenue do not result in increases in time spent working.
Avoiding the obvious response to the first line (keep raising your rate until you ARE rich trading time for money), let’s focus on the second. Some people believe the decision is binary – you are a service provider or a product provider; small businesses are at one end, and startups are at the other.
I like to think of it as a spectrum. On the left you literally are trading time for money. For every X increase in revenue, it requires an equivalent increase in time. These are the people who work on an hourly basis. On the right, every X increase in revenue requires absolutely no increase in time (or other costs). This is the ideal, but is for the most part unobtainable. All businesses fall somewhere in the middle.
Brian Gardner has built a hugely successful business with StudioPress. He builds a theme once and can sell it an unlimited amount of times without increasing the time spent developing it. BUT, each new customer does result in a marginal increase in his support costs. The theme development aspect of his business is perfectly scalable, but the support business is not (X number of customers results in Y number of support staff). StudioPress is on the right side of the spectrum, but not all the way.
I’m a WordPress developer that converts designs to themes. Rather than working on an hourly basis, I charge on a per-project basis. While still on the left side of the spectrum, I’m able to lean towards the right for the following reasons:
- The more projects I work on, the faster I can develop a site through experience and reusing code written earlier. This increases my effective hourly rate.
- The more projects I work on, the greater value I can provide to my clients through my experience. A site I built in 2012 is substantially better than the one I built in 2010 (even though that one was pretty good too :)). This increases the rates I can charge, most evident through my project minimum. For the past three years, every January my minimum for a standard project has gone up. But I personally believe the value I’m providing to my clients goes up even more than my rate has.
For these reasons, even though I’m putting in about the same amount of time of work each year, my revenue for 2012 is much higher than 2011, and I expect the same for 2013.
As a service provider, find the more scalable aspects of your business and focus on them. Likewise, find the aspects that are less scalable and decrease your focus on them. Here’s a few examples.
I’m able to increase my efficiency at developing simple sites more than I can complex sites. Complex sites usually involve more site-specific features that you can’t leverage across projects. Clients can see a huge value in a site built at my $2,500 project minimum, but as the price increases the value I provide approaches a linear trend. The higher the project cost, the more of the project is non-reusable “time-for-money” work. For this reason, I try to focus on the smaller sites where I can deliver more value.
I can increase my efficiency at coding, but I have a hard time increasing my efficiency on the phone. An hour long call I have with a client two years ago will still take an hour today. For this reason, I try minimize phone calls and other one-on-one communication.
- When you land on my homepage, you’ll see the services I focus on. If you don’t want those, you’ll leave.
- Once you’ve moved past that to my specific service pages or portfolio, you’ll see my project minimum. If that’s outside your budget, you’ll leave.
- If you’re interested in starting a discussion, you’ll send an email using my contact form. I’ll read it, see if I have any canned responses that address the questions you have, and modify it as needed (a lot of the initial emails ask the same types of questions).
- If you’re satisfied with our initial discussion, we’ll hop on the phone for 30 minutes to resolve any additional questions you have.
This is much better than my old process, which was to post a phone number and let everyone who lands on my website call me.
Products are an Investment
When you say you want to build a product that provides recurring revenue, you’re actually saying you want to invest your time (and possibly other resources) to establish an income producing asset.
The two factors that are most important to an investment are often not considered by freelancers turning to product development: risk and return. People want the recurring revenue, but don’t extend the thought process out to how much revenue they want, how much time they’re willing to invest, and how likely they are to hit their target.
But for every successful product released, there’s many that never made it this far, or made it to launch but didn’t generate enough revenue.
Before spending months or years developing your product, make sure there’s a healthy demand for it. Since you’re a freelancer already, maybe it’s something many of your clients have been wanting. You can decrease your risk by subsidizing the development cost through client work (a few clients hire you to develop this feature and you retain the rights to distribute it).
Make sure you can generate a reasonable return on your investment. If you can charge $200/hr for client work, and instead spend 1000 hours developing a plugin that sells for $20, make sure you can sell at least 10,000 of them. Also consider the time value of money. Yes, you might sell 10,000 of them over 10 years, but a dollar earned 10 years from now is worth less than a dollar earned today. It’s also a riskier dollar.
There are markets where you can trade your cash for income producing assets. Stocks, bonds, individual loans…. Building a product or scalable business is not the only way to have recurring revenue. These alternatives are less risky and don’t have a waiting period.
Consider the Long-Term Costs
Since WordPress is GPL, and all derivative, publicly distributed works are also GPL, many developers who sell themes and plugins are actually in the support business. You need to make sure your revenue per customer covers the lifetime cost of supporting that customer.
Let’s say you’re selling a theme for $50, and you’re getting 100 sales a month. You’re doing pretty good! At first the money is rolling in, and the support costs are low because you don’t have many users. Two years down the line, sales have dropped to a trickle, but now you have a customer base of 2000 that’s still requiring support.
Make sure that $50 you earned from the first customer can pay the cost to support that customer. Don’t build your business in a way that the current month’s sales pay the support costs of all the existing customers, and you need to keep growing sales in order to maintain your actual product: support.
Do as Gravity Forms does and limit your support to a defined period. Or, separate the cost of the scalable item (the product) and the non-scalable item (the support), and charge accordingly.
Since even your consulting business has scalable, “startup-y” elements, it’s beneficial to think like a startup. This means your time is worth $1,000/hr, and read everything else Jason Cohen has written.
Before changing your business strategy from consulting to products, consider if there’s ways you can improve your consulting business to include some of the benefits of a scalable business.
Enjoyed the article? Check out my WordCamp Austin talk on Managing a Freelance Business