Last week I offered some thoughts about getting started as a freelancer. Today I want to talk a little about growing your business once you’ve managed to get things running. Two main things we’ll talk about are cultivating a client list and how to price your services.
As freelancers we sell services. We get paid for putting time into a project and how much we get paid all comes back to a simple formula.
Revenue = Billable Hours x Hourly Rate
You don’t have to and you really shouldn’t be charging clients per hour, but no matter how you charge the above equation is in there somewhere when it comes to you making money. We’ll get to pricing in a bit, but first I want to share something I should have mentioned in the last post, about writing a business plan.
Writing a Business Plan
Andy mentioned business plans in a comment on the last post and I really should have included a section about business plans in that post. I’ll offer a few thoughts about them here.
Most people think of business plans as these formal documents you take to a bank for a loan or to investor for financing in your company. Unless you’re looking for financing a form plan really isn’t necessary. Instead I suggest writing an informal plan.
I had no idea what a business plan looked like let alone how to write one, so with a little searching I found the sample plans at bplans.com. The plans are there to sell you on the software, but the software is necessary. Download a plan that seems similar to your business, make a copy, and delete everything except the outline. Then start filling the outline back in with your own plan.
Don’t feel like you have to fill in everything. For example I felt financial predictions would be 100% guesswork so I skipped them. I focused on who my clients would be, the services I would offer, and my unique selling proposition.
What this did for me was to get me thinking in more detail about my business than I had to that point and it helped me set the direction for my business.
Every so often when I feel I’ve lost focus or direction, I refine my plan. Now it’s more creating a simple text file and putting my thoughts down somehwere. Mostly it’s stuff I’ve been thinking about and the act of writing it all down seems to help me.
My original plan still guides me, but I’ve revised it here and there over the years.
Just Say No
abhinav also commented on my previous post with a question about working free for friends and family. You have to learn to say no.
In the beginning it’s easy to think that you should take on everyone who contacts you as a client. You shouldn’t. You have to learn to say no. This was one of the hardest lessons I learned and probably the most important. The moment I started turning bad business away was the moment my business started to grow.
Some clients will always drain your time or energy. Years ago I had one such client. For every hour I was paid to work I had to put in about 4 or 5 hours of time. He’d haggle over everything down to a few dollars and before even beginning a project I was working at a loss given all the time spent estimating costs and coming to an agreement with him, if we came to an agreement.
I needed his money. I wasn’t making much elsewhere so it seemed logical to be working for him even if I wasn’t making what I should. Something was better than nothing I reasoned.
The cost though, was in opportunity. For every hour I worked for him I couldn’t work for someone else. I also couldn’t put the time into marketing to attract better clients. The people he recommended were only going to be like him. All he was going to lead to as a client was more of the same. It would be me working long hours for little pay and lots of frustration.
The best thing I ever did was cut him loose. From that point on I learned to spend more time investigating potential clients before deciding to take them on. It was hard turning away paying work while staring at rent or the phone bill, but it really was the best thing I ever did. In time I began attracting clients who didn’t drain me and my bank account. And those clients recommend me to others who are also good for my business.
Some advocate cutting the bottom 5 – 10% of your clients every year. I don’t think you have to do that so formally, but if you have a client who’s more trouble than their worth, let that client go, and don’t be afraid to say no to new clients if you have reservations.
With friends asking for freebies you also need to say no. Now we all have friends and family who we won’t charge for work. I’m not going to charge my mother or brother if they want a site. Everyone else is paying. If friends and family insist you work for them for free then you should do the same. Walk into their place of business, grab some items off the shelf and tell your friend thanks for the free stuff. They’ll likely stop you, at which point you can ask why they expect you to pay when they don’t think they should.
Learn to say no.
Thoughts on Pricing Your Services
I mentioned at the start that your revenue comes down to a simple formula of hours worked x hourly rate. I think it’s best to give clients a price based on their project and here’s how I generally go about setting a price.
First determine an hourly rate for yourself. Base this rate on your experience, where you live, how much money you need to pay your expenses. Try to set a rate reasonably in tune with others in your area. When I was setting mine I looked at other web designers in Boulder and Denver who offered similar services and seemed to have a similar experience to myself. Some posted those rates on their sites. Others I called or emailed with some quickie questions that gave me a feel for their rates.
When a client approaches me for a project I do my best to learn as much as I can about the details of the project and then break out the different tasks and estimate how long each will take to complete. When I’m done I multiply by some % based on how confident I am in my estimate and how well I do or don’t know the client.
Especially early on you won’t really know how long it takes to complete certain tasks. An estimate can be more of a guestimate. That’s the reality of pricing your services
In the end I might increase the estimate by 20 to 100%. The estimate is then multiplied by my hourly rate and we have a quote to send off to the client. The time factor idea is actually something I learned from being a structural engineer many years ago. Engineers apply factors of safety to their calculations to account for unknowns.
The Empire State Building had a factor of safety around 4.0 (if I remember correctly). It was designed to be 4 times as strong as the calculations at the time thought it should be. Today buildings might have a factor of safety around 1.2 to 1.5 applied as we’ve come to understand building materials better. There’s more confidence in what we know so the factor of safety is less.
One thing I can’t stress enough is to track your time when working on a project. Track each task you perform. In the beginning you won’t have a good idea how long something will realistically take. As you track time over a few projects you will. My first few estimates varied widely. Now I can estimate pretty well and hardly need to apply any factor of safety.
Create Happy Clients
It costs more to attract a new client than it does to attract new business from existing clients. Ideally if you do a good job and treat your clients well they’ll keep coming back to you with more work. There are a few things you can do to nudge them a little.
- Offer ideas to improve their site. The ideas need to be genuine. Offer a few while working on a project. Your client won’t implement all your ideas, but if they’re good ideas they will implement some of them.
- Reach out and say hello. Sometimes it pays just to say hello. One year I sent every client a personal email wishing them a Merry Christmas and a Happy Holiday season. I was very busy in January. Several clients had been thinking of contacting me about work. My simple email reminded them to do it now.
- Offer limited time discounts. When business is slow you can reach out to clients and offer them a discount on your usual price if they send you a project. Make the offer for a limited time and try not to make this offer at the same times each year or your clients might hold off sending you work until you offer another discount. This isn’t one I’ve tried myself, but I know others who have been successful with the approach.
- Send clients helpful information. This is similar two the first two points. Sometimes I’ll come across information I think will be beneficial to a client so I send it to them. The information doesn’t have to be anything that might lead to work for me, but it could. It’s a good way to say hello and show your clients you’re thinking about them and how to improve their business even when they aren’t paying you. It’s a great way to establish trust and build a stronger relationship.
- When it makes sense offer to work on a retainer. Some clients need work on their site every month. You can figure out how much this averages over the year and offer the option of a monthly fee based on that average. Usually I’ll discount the average a bit. This helps smooth out your cash flow and it saves on estimates and negotiating. With even a small discount your client will likely save money over the year so it’s a win-win.
I usually place some caps on how much work I’ll do each month for the price. If a client is going to pay you for 5 hours of your time each month, I wouldn’t design and develop a new site for them in that time. I’d certainly put in 6 or 7 hours one month if they needed it. Whether or not you should base the fee on hours is another matter.
One last point. The more you get to know your client and their business, the better you can serve your client. You’ll be able to reduce the factor of safety in your estimates and you’ll be better able to suggest good ideas that can help your client’s sites and get you more work. You’ll be creating more win-win scenarios.
As you work with the same client again and again it usually becomes easier to work on their site. You’re more familiar with it so it should take less time to make similar changes. This helps reduce your cost.
Spread the Wealth
One trap you can fall into is relying too much on any one or two clients for your income. No matter how good your relationship with a client the work could stop coming for any number of reasons. The client may not have work for you or your contact at the company has moved on and the new person brings in his or her own contacts.
If that client was providing you with 50% of your income then it’s possible you can lose 50% of your income overnight. I don’t know if there’s an ideal max % of total income for any single client, but I’d suggest keeping it below a % you feel confident you can survive without.
The way to do this is by finding new clients and new types of clients so you’re not so reliant on one or two. You want to diversify your client list.
You can look for clients who tend to send you work at different times of the year. Some businesses usually have more money in the summer and some in the winter. Odds are they’ll send you work when they have more money to spend.
Naturally you wouldn’t drop a client who sends you a lot of work. The point is to not get satisfied and think everything is great, because you have one great client. You want to do what you can to spread your income over as many clients as possible. That way if one moves on it doesn’t affect you all that much. It’s a lot less stressful to lose 5% of your income than 50%.
Starting a business is difficult. Growing a business is also difficult. You can never be comfortable with where you are. If one or two clients stop sending work it could easily take a way a significant portion of your revenue. You want to do everything you can to keep growing. Work to gain more clients. Work to build better relationships with existing clients.
Learn to say no to draining clients and track your time so you can better estimate future projects. Seek new clients, but also seek new work from existing clients. That latter will cost much less. Get to know your clients and treat them all as well as you can.
Spread your revenue over as many clients as possible. Naturally there are limits to how many clients you can serve, but don’t be so reliant on any one or two. Things happen and clients do move on or simply don’t have work for you for periods of time.
I have one more set of ideas about scaling your freelance business to share, which I’ll save for next week. Think about the simple formula of revenue being equal to hours worked x an hourly rate. There’s a limit to how much you can grow offering services by your lonesome. You can:
- Increase the billable hours you work
- Increase the rate you charge
- Reduce costs by working more efficiently
Each can only be taken so far when you work for yourself, since it’s all based on the idea that your revenue is tied to hours worked. There’s plenty of room to grow within the above 3 concepts, but if you want more there are other things you need to do. We’ll talk about those things next week.