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.
Thomas Griffin committed months of work to the development of Soliloquy. It paid off, and he’s now able to scale back his consulting services as Soliloquy supplements the income.
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
Trish Jones says
Bill, this article is down right spot on and premium. I can’t even add to what you’ve said except that I now have a premium answer for when people keep suggesting I go into products, which I have little interest in.
A big thank you for such an in depth explanation and analysis.
Reid Peifer says
Reid from Modern Tribe here.
Couple thoughts that often get lost in this conversation. There are certainly pros & cons to different approaches – but you can apply multiple approaches to your own business. We run both a service and a product business, and within the service business we apply both fixed fee and hourly billing to our work. Essentially – we’ll do whatever is going to work best (for us and the client) per the given context.
The product side of the business demonstrates steady incremental growth – which is great. The service business can be far more erratic – which means higher highs and lower lows. Stable products helps flatten that erratic nature. The successes of the service business allow us to invest in new product development – essentially acting as our own investment arm. Our products business is much stronger because of our service business and vice versa.
On the service pricing model, one aspect that is often overlooked is scoping. If I’m in a position where I can clearly understand and define the scope of what would result in a successful project – then I’m comfortable working under a flat fee with the potential for increased profit. If scope is fuzzy, or the metrics for success are difficult to evaluate – then flat fee based work becomes a risk and I’m happier to work at our hourly rate (which also includes a portion that we’ve defined as profit). It’s essentially a question of risk vs reward management. I acknowledge that we’re in a position where I can invest our own time in scoping larger projects, or demand a consulting fee to cover that time investment. That enables us to perform fixed fee work on much larger scopes. That can be a challenge when you’re a solo show.
I can see a lot of value in setting package based pricing for service work. It does an exceptional job at setting expectations up front – which I think is the biggest challenge of any service project. When working in the small business world – setting upfront expectations can save your ass and help guarantee some viable income. There are some adverse side effects to this approach though. It can stifle growth – not speaking solely in terms of $, but in terms of your skill set, experience, and personal growth. Part of what allowed us to grow as a company was a desire to tackle new projects outside of our comfort zone. Package based pricing can discourage those opportunities (note – discourage not eliminate).
Bill Erickson says
Love your thoughts. I think you guys at Modern Tribe have also found a great balance between products and services.
One more thought to add: you need to consider what kind of business you plan to build. Do you want to be a company of one, being flexible to changing market conditions but limited in the scope and scale of services you can offer? Or do you want to grow a company of many individuals.
It would be difficult or impossible for an individual to replicate the business approach of Modern Tribe – there’s not enough time in the day to manage a services division and products division of the quality you do.
I love the idea of having products that flatten out the revenue curve, but I know I couldn’t build a successful product and maintain my consulting services. I’d need to be like Thomas Griffin and give 200% to my products business (and even then I’d never be nearly as good at it as he is).
Reid Peifer says
This is totally spot on.
We were able to enter the product space by commoditizing our byproduct – essentially a client paid us to build something that we were able to spin off as a product. Without that, entering that new business space would have been very difficult.
Every significant effort on products since then has involved an upfront of service work, savings, then a corresponding quieting of service work while product focus happens. So, we may be bigger but the same principle of not doing too much at once still applies. With proper planning I think a soloist can bounce back and forth – though it is very much a challenge. Even for us, the service business is constantly competing with and distracting product resources.
Ongoing support is the wildcard. If you can’t to some degree systemize support and put some constraints and structure around it, you’ll be sunk. Don’t get into the product side without having a plan for, and being excited about customer service. Your commitment to serving your users is your *real* business – not solely the product you build.
Again, totally agree with Reid, it’s the same way we practice.
Bill, I think you’re perfectly aligned for having a product, but perhaps not a consumer facing product like TG’s Slideshow or Gallery – but more the business or developer side.
Like your custom CMS or a specific project calculator for managing time, revenue, profit etc. If you’re building these systems and features for yourself, it would be easier to put a price tag on it.
You can also attract a higher paying client depending on the product which will give you breathing room for support etc.
Bill Erickson says
I’m always keeping an eye out for products. Just because I don’t do them now and say I’m not interested, doesn’t mean I won’t be selling a product a year from now 🙂 Things keep changing.
That said, Reid hit on my main holdup – support. I hate providing support, and I’m really bad with my free plugins on WP.org (usually log in every month or two and answer some).
I can’t see myself starting a business that requires support as a core competency. So either I’d sell something without support, or have to bring someone in to manage support.
Adam Binder says
As a designer I have also found that focusing on the low to mid range websites provide much value to my clients and give me reusable elements for future designs and that the higher end ones typically have less to reuse. This makes the lower cost jobs actually more profitable because I can do many of them quickly. On the other hand, the bigger, more unique jobs add to my portfolio so I can charge more on future jobs.
Thanks for such an enlightening post!
Great post. Seems to me this post was written two years ago AND still has merit today. Being an Entrepreneur or Solopreneur has one common denominator; Disciplined Passion for Business. Without it, it’s just a hobby. It is a must to always be open to new ideas and try them at all levels of development, service and support as this industry evolves. Our businesses must be flexible and adapt to stay current. Tracking progress on all levels, as you have done Bill, is essential to see what is lucrative. After all, if you are not in the business to make money, then you will not be in business.
niken groups says
Thanks for this contribution. Very reasonable argument for not making the shift, as you say Bil.
Luis fred says
In my point of view, i like something change every time.
To do something different from others. As i am a designer so, my priority to give my customers something different ..
Thanks Bill for this wonderful informative post ..