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.
In Summary
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
Jon Brown says
Excellent write up of all the facets of a modern WP centric business!
I could highlight a dozen exceptional well said statements, but wanted to extend the discussion a the end from consumer of commercial open source code. As a consumer I’m fully comfortable paying reasonable fees for code and support, one thing I really do wish though is that plugin/theme devs would adopt a model that looked more like this: Pay $100 for code+lifetime updates+1yr support, renew yearly support optionally for $20/yr. The issue for me is that websites usually have lifespans much longer than one year and if I use someone’s code I want minor updates to that code that might be critical to it continuing to function with a new version of WP. What I don’t need 24 months down the road is support on how to use/install/manage that plugin, if I did need that I’d gladly pay for it. (Note, I’m not saying major version updates should be free for life, just that the minor “mostly bug fix or compatibility fix” type of releases should be).
I wholeheartedly agree with everything you said and hope my little rant above isn’t too off topic. I’ve seen so many fellow devs try to adopt the “product” model or email marketing model and far too many flounder at. It’s great to see a well written defensive of one of the the alternatives.
Bill Erickson says
I completely agree. I’ll take it further and wish the WordPress community would decouple code and support. As a developer, all I need is up-to-date code and some documentation. Sell it to me for $XXX for a lifetime access to that, but with no support. If I choose to have support, I can pay an extra $Y every month or year.
Jean Galea says
+1 to this, makes a lot of sense!
Mike says
As much sense as that makes, the GPL works against that approach. While the GPL does not forbade selling code, it makes it less practical and you run afoul of the WordPress mob by making money in ways not approved.
Conversely the GPL would allow you to get your hands on the code, for free, if you don’t want the support.
Bill Erickson says
I agree, it could be difficult to do due to the structure of the GPL – anyone who buys it could then distribute it for free. But the theme shops right now don’t seem to have an issue with that right now under the same constraints. I think it would be an interesting experiment to try separating the code from support costs and see if it still works.
But at the end of the day, I wouldn’t want to be in the business of selling code. GPL code should be free and openly available since that’s the end result of releasing it. If you’re giving your customers the right to distribute your code for free, you might as well do it to retain your brand and sell complimentary services (ex: support).
This is technically what the theme shops do right now, but they don’t advertise it. If you purchase Genesis, you’re really just buying support access since anyone who ones Genesis can give it to you for free. Anyone could post Genesis online for free and be within their rights.
Someone could force the issue by purchasing all the themes from the major theme shops (StudioPress, WooThemes…) and post them on GitHub or a website. Once this is done and widely known by average users, the theme shops will need to update their marketing to reflect what they can actually control under the GPL.
Ade Walker says
I think the challenges facing theme shops are slightly different to those faced by freelancers, and Bill’s post outlines a great strategy for the latter. I, too, in most cases charge on a fixed fee model and make a much better return per hour on short, less complex projects than on big, complex ones.
Looking at theme shops, StudioPress (and formerly Revolution) has moved between two or three pricing models over the years. Separating code from support didn’t work out and they moved back to a fixed fee for code plus lifetime support. Clearly, that tells us something.
Another point I would add is that I suspect theme shops (at least those high volume ones such as StudioPress and Woo) aren’t so worried about GPL for the simple reason that the people who “steal” their code wouldn’t have bought it in the first place. In other words, a “pirated” copy (so to speak) doesn’t necessarily represent a lost sale…
Matt says
Part of my shtick in selling WordPress services is the fact that previous to this industry I was in auto sales.
I love what you said about being more efficient and I just talked about this on a recent interview over at FreelanceJam.
We track our own internal processes, systems, and work hours in order to create an average cost of doing a project. Much like in the car industry, if you brought your car in for warranty service repair, the manufacturer has a “book” that they suggest the average mechanic should take to repair the job in question.
We’re taking some of these operational ideals and applying it to our practice. Of couse because creative is so suggestive to every project – we’re not 100% accurate – but we’re pretty darn close at estimating in particular verticals.
I think you’re right on with this post, service could be making a “come back” at the right price. There’s a lot of noise in the app/product market and boiling it down to just great damn customer service will come out a winner.
Devin Reams says
Good write up, Bill. One reason someone might continue to do consulting is they can provide a solution for a unique (custom based on problem, client, industry, etc.) solution versus a repeatable product or service which, as you mention, can scale.
We at Crowd Favorite try to solve new problems every day which is why a consulting (time) business should still make sense at our end of the spectrum. Thats not to say we don’t have and leverage best practices nor haven’t already seen some common things we can likely solve more efficiently. 😉
David Wang says
Hi Bill, I’m David from Malaysia 🙂
Excellent points in your post, which are very relevant to me as well. As a new entrepreneur I decided I needed to go the route of creating products. But as my business has grown and matured, I find my income coming largely the way of services.
As you point out in your article, support goes on after the financial transaction ends for product-based business models. My business model is a service-based subscription, so my obligation ends once the financial transaction ends. For context, I provide WordPress support plans for bloggers and small business owners.
Thanks for publishing your thoughts here. You’ve articulated my thoughts and own experiences in a way that I could never have done. Wishing you a Merry Christmas and much success in 2013!
Paul says
Interesting perspective. I’ve seen more discussions about hourly vs project rates for development projects, there are a bunch on the Modern Tribe blog explaining the pros and cons of both approaches.
Do you think it’s easier to charge per the project when you’re a household name in your niche? I have lots of prospects insist on hourly rates vs a project price. Have you noticed any change in that as your business got more successful? I’ve gone back and forth with my pricing model but I can see the benefits of fixed project pricing. Also, I suppose it’s easier to stick to your guns when your pipeline is full.
You mention you stick to one kind of project which is relatively small projects that you are used to doing, because those are the ones with the biggest profit margin. It totally makes sense business wise, but how do you make it interesting? Where’s the challenge? Do you have work on side projects where you can get out of your comfort zone and learn new skills?
Bill Erickson says
I haven’t really noticed many prospects that demand hourly work, but that could be selection bias due to how I market myself. When I do hourly work (very rarely), the clients seem more interested in using up the hours they’ve paid for than in the solution I’ve actually provided. If they pay my 10 hour minimum for retainer and I only use 7 to build what they want, they try to find ways to use up the last 3 hours. I think project-based pricing (if you are working on a whole project) better aligns the interests of the client and developer.
Until your pipeline is full, you gotta work on what you can get. As you start filling up, you can be more selective. This is when you can start identifying and focusing on your more profitable types of projects, but also selecting interesting projects outside your normal area.
I do take on some larger, less profitable but more interesting projects as well, since this is how I learn and expand my skillset. I’m not completely numbers driven 🙂 But I recognize where most of my earnings come from and focus on that first.
James Dalman says
Paul,
I have always believed and taught that per project pricing is way more profitable than hourly fees.
When I first started out, I charged $10 an hour. Back in 1990 that sounded like a lot! Then my best friends grandpa challenged me to quote by the project. He basically taught me that if I quoted a project and could do a great job more quickly – and sold on value – the more profitable I would be. Here’s an example on my past logo work:
4 hours @ 10.00 = $40
4 hours @ $1,250 = $312.50 per hour
I was doing the same exact work. But when I learned to charge by the project, I actually started making a living! Eventually I raised my rates dramatically and became even more efficient at my work – to the point I could make $750 per hour for what others were charging $75 per hour for.
Bill’s idea of finding your sweet spot in business is VERY effective. While it isn’t as glamorous or challenging when you can do the work in your sleep, you can make a great living and then take on more creative/challenging projects to fulfill personal needs.
Amit Singh says
thanks for writing this up Bill, it clarified few things for me especially on how to move my service business towards more of a productize side without actually creating any product, I was already thinking on how to repackage my services in standard way and charge per project instead of per hour.
Steven Slack says
I think it is important to note that while you consider changing your business model also be aware of your values. Do you want to start selling products just to increase revenue? Or do you really have a product that is amazing that you want to share with the community and you think it will benefit everyone? Obviously you need some financial support in maintaining a good product, but what is your motivation? Also lifestyle plays into this as well. I personally enjoy consulting and providing a service to my clients. Others may find more joy in providing support for their product. But lets also consider our motives and values when looking at changing our business models. This will better serve the WordPress community as well, because your products or / and services will have real value behind them, not just motivated by switching your approach to bring in more revenue.
James Dalman says
Bill,
Great thoughts and something you and I have even discussed before.
I think if an entrepreneur (for this conversation we’ll assume developer/designer/consultant) desires to create a product for the reason of satisfying a market or need, than it’s a worthwhile goal. If the objective is only to get “easy, passive income” into the mailbox, that may ultimately end in failure.
Most people don’t realize the work that goes into creating, selling, and supporting a product such as a WordPress theme or plugin. They don’t understand that you can spend incredible amounts of time and money, only to become a slave to the support requests of their customers. The goal of being able to make money while you sleep or when on vacation can become the nightmare of you are always responding to unhappy customers because they expect an answer NOW!
As a designer and consultant, my reason for considering the product line is a way to compliment my services and to raise up other great designers who can either help me build my business or build their own. This allows me to work on the best projects and also to provide work for others. But it does require an investment.
The other notion in that some people believe you are not a real business unless you have a team or offer a product is hogwash. Solopreneurs tend to build a business that provides great benefits and results to their clients, while providing a flexible lifestyle for the entrepreneur. Why is it not generally acceptable to be the freelancer who mostly works alone?
The likelihood that my design business will die with me is great, but that is OK with me. I love what I do and that I can build stronger relationships with the people who work with me. I can provide a level of service that bigger, scalable shops will not be able to do. I am content with that and that is what matters.
OK, so all this being said … you are spot on Bill and you’ve provided some excellent points here.
Mike Healy says
I’ve always thought charging a one-time fee for a theme and providing lifetime support was risky at best. I don’t know if some providers did that out of a sense of generosity or competitive necessity, but it seems unsustainable. I also agree about smaller projects often being more efficient than bigger ones.
Mario Peshev says
Recently I’ve been observing a trend for people to ‘convert’ to project-based fees just the same way as the ‘cool kids’ used to charge hourly two or three years back. I’ve tried the hourly/project/product schemes and failed miserably at 2 and 3.
Product-based approach had the ‘support’ clause the life cycle of which you have just revealed – theme sales are constant (or even reduced in time, due to the theme getting old-fashioned) and support is increasing drastically.
Project-based estimates ended in two possible ways: either in an insufficient initial negotiation and project preparation (leading to arguments with clients and requirements that were not mentioned at all) or spending almost as much time on negotiations and specifications at the beginning as on the work further (not to mention that after the negotiation + estimate the client could reject the offer).
My personal losses on project-based estimates are probably in the 5-digits scale now (except for conducting a training, which is a time on-site + preparation of training materials, but still a project fee), whilst the hourly payments have been rewarding. What’s your approach on estimates for your services?
Bill Erickson says
Project based pricing only works if you can clearly describe the scope and estimate the amount of work required, quickly. If the scope can’t be defined well, then you’re either massively under- or over-quoting (or your extremely lucky at pulling numbers out of the air). If the estimate can’t be put together quickly, you’ll be spending more time quoting work than actually working.
For over a year I kept track of the revenue and time spent on all projects, which allowed me to calculate my effective hourly rate on all projects. I looked for commonalities across my lower earning projects, and here’s what I found to prevent them:
– I require a finalized design and a scope of work document (which I prepare) for all projects. This prevents scope creep and helps keep my time/cost estimates in line with reality. If they don’t have a clear idea of what they want, I recommend they hire a designer to mock up their ideas for clarification.
– I focus on smaller projects, which are easier to estimate than larger ones. I found that on projects where I quoted more than $10,000, my effective hourly rate was at least 1/2 that of other projects. The larger the project, the more I underestimate the time involved, so I just avoid quoting on them now
– There’s a lot of project types I avoid because I don’t have enough experience to accurately estimate my time required: ecommerce, BuddyPress, IDX integration, and a few others.
The list above should describe the areas where an hourly rate would be better than project rate. But when possible, a fixed fee is preferable over hourly since you are rewarded for efficiency.
Clients also prefer it because they know the cost going into it. If it’s difficult for me to estimate how long it will take, it’s absolutely impossible for the client to do so.
Mario Peshev says
Right – so, at the end, it has it’s own limitations.
I haven’t been freelancing for the past few months, but until then I used to decompose the project to several main modules and estimate them with hours, like:
-admin: 4-6h
-dynamic popup JavaScript logic for all browsers: 8-10h
-styling: 2h
-database interactions and blah-blah: 3-4h
Therefore it’s easier for me to calculate what I’ve understood quickly by several bullet points. I explain to the client that these few points are what I’m about to implement and there is a free slot for expansion which would be calculated extra.