One of the toughest parts of running a freelance business is the lack of stability of income. Many find this a show-stopper during the first years. Some prevail for a decade without complaining about it. So what’s the secret sauce for long-term success, how to negate the effect of unstable income?
I’m the opposite of a numbers guy, but I find that sometimes it makes sense to trace back what you’ve done, analyze it, draw conclusions, and form new hypotheses to be tested in the near future. In other words, use the scientific method.
It’s very much like in The Martian, you know, the movie starring Matt Damon who at one point realizes: “So, in the face of overwhelming odds, I’m left with only one option: I’m going to have to science the shit out of this.”
Without having a decent growth vector for your freelance business, you might end up too near to starvation in a place where nothing grows, like that guy in The Martian.
That’s what we should do. We should science the shit out of unstable freelance income! “Let’s do the math.”
What you think you get
One would think, after years of history of having a cozy day job where someone else takes the business risk, that doing your freelance business is something that starts small but grows steadily as soon you just get started.
You must have seen those funny articles about what a freelancer should charge that allow you to factor in all the costs you have starting from electricity bills, website hosting fees, Dropbox subscriptions, personal holidays, and daily coffee shop visits summed up for an entire year and divided by actual working hours?
And you must have seen those funny calculator widgets on so many websites where you can just input your numbers and you get an hourly rate as the output. And that should be the price you ask from your client…
That’s all complete BS!!!
First of all, when working in the global (gig) economy where the client could be located anywhere in the world, your base costs have no meaning or relevance to the client. Absolutely none! This means your pricing should be based on what profit the client can make from working with you which is either an increase in revenue or a decrease in costs.
At best those calculators can only give you the minimum price you should ask. And hourly billing is not a good way to do it in the first place, BTW. Why start from the minimum if there is a chance that your good clients would be able to pay more?
Second, all of those calculations are based on the assumption that the business is stable! They seldom are. But if they were, the graph in your mind could be something like below.
Let’s first set the parameters. It doesn’t matter what field you’re in, what normal pay you had in the day job, was it higher or lower than the average, and so on. It’s all about proportions and the efficiency of your time spent on doing freelance work.
So, let’s assume:
- Your ex-day job paid 5,000 a month (whatever currency), so you made 60K a year, 120K in two years. That’s the stable income we compare everything to.
- Your freelance work tops your day job in terms of valuation by 50% (which I just grabbed from this article). That brings 7,500 per month when your calendar is fully loaded with paid work.
- All costs are small or irrelevant, so the “price” in the chart is basically your revenue and almost the same profit. (I make this simplification on purpose just to make the comparison between the approaches obvious.)
Let’s examine how it would look. You start from 0 earnings and work your way up with a certain acceleration factor. Let it be just an average increase that you achieve month by month. Here, we start from 10% of what you could make and increase by that 10% every month until the +50% pay is reached. That would happen in the 15th month.
Expected stable growth that never happens vs. the previous stable day job.
Basically, as you can see, your entire first year would run on a deficit of one-third compared to your day job! Yet, at the end of the second year (after 23 months, to be exact), you would reach profitability and if you could keep it going, the profit is there as long as you keep doing it. In theory, that would bring you a constant increase of 50% compared to that safe day job and therefore it looks like totally working out for you. It just takes an investment of about 2½ years to get there.
Unfortunately, there is no silver bullet that brings stability. The Excel sheet lies (and even the sheet itself knows it). I wish there was a silver bullet because if stable growth was not a complicated thing to do, there would be a way to accelerate it, too! It could be, for instance:
- Buying marketing support to establish your presence in the market
- Hiring people to do your sales so you can focus on the execution
- Hiring people to handle execution so you can focus on sales
- Getting a mentor or a coach to avoid pitfalls and find a winning strategy quickly
- Building partnerships that make your offering stronger than your competitors
All this would be more like what small business owners with employees might do. In that case, when you had some magical way to accelerate your business, your growth would look something like the graph below.
Fast growth (that never happens) vs. slow growth (that never happens) vs. the previous stable day job.
In this case, at the end of the 10th month, you’d be getting the same income as with your day job. That would be so nice!
And the best part: At about 19 months and a week, you would have the same total earnings as a 24-month day job worker, about 120K. Almost 5 months faster! How sweet would that be?
After talking with hundreds of other freelancers, I noted that not a single one said having achieved anything like this! Why? Because the beginning is hard. If you start from scratch and you have nothing but a hunch of where the money could come from, you’re literally in the zero income class for some time. That can be a very nasty period of time.
How most people seem to start is that they “fish” some projects from friends, contacts, connections, and ex-employers to get started with. That’s how I started too, with an innovation award I got via my good old student buddy. But sooner or later there has to be a way to fill the gap between getting the 3rd or 4th project, perhaps, when you realize that the number of people you already know who could become your clients is limited.
You need genuinely new clients. Many hit this limit around half a year from the start. The immediate easy sources of projects become exhausted. It’s like a gold mine. Eventually, there’s no more gold and any further digging is just a waste of time. You already got all the gold the mine contains.
So, more or less, you are likely to see that $0-month somewhere during the first year. And depending on the type of work you do, a month is too short a period for meaningful comparison and analysis. Or too long. It depends.
What you actually get
Where the above theory goes wrong is indeed the stability part. The first months might be nothing but a ride up and down like a rollercoaster. It could be the typical case for the whole first year. The graph below reflects the reality much better (even though I made this random data out of thin air).
Sometimes you have good clients who pay more than your day job but might not offer full-time work. Sometimes you get nothing at all. And sometimes you totally nail it for the whole month and each that +50% pay for a month. But the randomness makes it look freelancing like a bad option!
Unstable and random growth represents reality. Even a couple of good months don’t make it good if you still have some months with no earnings at all.
So, let’s face it. The problem is in the value of the work and the factor by which your work would compare to the day job. It cannot be 1.5 (50% more)!
This means the only reasonable way to freelance in practice, as we must assume the instability of income is more or less constant, is that your base work is worth at least double the day job to get away from a constant deficit, starvation, and all that misery.
Unstable growth with double pay compared to the day job makes it worth the risk… Maybe?
And triple would make it quite worth the risk! This is where freelancing, even with an unstable income stream, starts to make sense.
Unstable growth with triple pay starts to make sense after just 1 year and to look quite lucrative after 2.
What you need to aim for
So, fortunately, there is a way out of that misery. The trick is to do the opposite of what The Martian did, i.e. figured out to grow potatoes in his own droppings for food, almost starved to death, and didn’t take a bath in years to save water. Not the most lucrative career path! There is no point in trying to go into survival mode and just try to stay alive long enough until something you only wish for happens. NASA won’t come to save you or any other freelancer, for that matter! It won’t happen.
What should happen is that you manage to make each of your work hours, a workday, or a workweek, count for a lot to each of your paying customers. High impact, great value. Your value should reach a point where a relatively small amount of worktime translates to real income that serves as a basis for your business on its own. (My simple principle I’ve applied since a long time ago is explained in detail in this article.) The cozy life comes somewhere around the factor of 3X, 4X, or 5X. Of course, 10X is preferred if you can stretch it that far. 😉 Here is the graph to illustrate how the 5X case would look like.
5X income makes the day job look like a bad option… 😉
Having 500% rates compared to your old day job means that even with a random income stream you might get to the same total earnings in just half a year. Almost double income after the first year.
Now, regardless of how “bad” your month is in terms of the work amount that you get, you end up earning something decent regardless. Now, good months pay a lot! You can even skip some months and spend the time on other things, so the problems you start thinking about becoming entirely different:
- How to optimize everything (marketing, sales process, execution) even further
- How to improve your clientele as the second-best types of clients won’t be interesting anymore
- How to make the best use of the time you don’t need to spend trying to do freelance
- How to invest
- How to productize your skills and sell something on a large scale
This means that you get very close to the dream state of so many people: financial freedom. That’s what the ‘free’ in ‘freelancer’ actually means! 😉
But that’s a bit too rosy picture, isn’t it?
Most people do not have the skills to jump into the 3-5X day job rates just like that, of course. So there must be something else that counters the problem of the instability during the process of getting there. There is a missing step.
The trick is rather obvious when you think about it: You must run on multiple tracks from the beginning!
As an intermediary step before getting into the 3-5X rates class where the randomness doesn’t matter anymore, you can build your business so that you always have something more or less stable so that you don’t need to see those nasty months of 0 earnings so often. It doesn’t matter so much what it is or how big it is. The bigger, the better, of course, but it should be something that brings in at least a little bit of cash every month. Every month.
You will need something big that keeps you occupied when things go well, and something small that are either long-term assistive types of things where the money comes regularly, or short-term gigs that come and go but are quick to get and easy to fit into your schedule at any time. Multiple different tracks.
A personal example. Over the years I built seven sales channels (see more in the Freelancer’s Sales Channels article) and established three business tracks:
- The R&D track since Day 1: Short intensive or long part-time software development projects.
- The coaching track since Year 1: At first Ph.D. students, then first-time startup CTOs and freelancers.
- The consultancy track since Year 3: Short precision strikes to help various clients without spending much technical effort in it and with very high rates (which are justified because of the high impact).
So, at any given time, no matter what happens, I’ve had something going on. My business is covered.
OK nice, but where’s the science?
I admit that for this piece of “science” I made up all the data myself. Real scientists don’t do that, I know as I am one. Yet, drawing numbers from my own business would give a flawed example that would not apply to others. So, whatever your currency is and whatever your day job numbers are, just look at the proportions in the above figures.
Yet, despite the fake “data” that I used here, I claim that the conclusion is valid. The best way to negate the impact of unstable freelance income is to get to the high-paid class as soon as possible. The magic happens when your numbers are around 300-500% of the pay of a day job. You will need:
- Marketable skills so that you don’t need to spend much time on finding new clients for small assignments.
- A very specific niche where high fees are acceptable (and there’s no problem changing it from time to time).
- An impeccable reputation among your (intended) clientele.
- An efficient marketing approach.
And you might want to run on multiple tracks until you get there to make sure someone is always paying you at least a little bit so the number of 0-earnings months is minimal.
The path of solopreneurship
What all of the above means is that every freelancer needs to be is a solopreneur, eventually. The faster the better. Don’t get stuck in comparing your income to that of your previous day job, that only gets you to the 1.5X income class but you would still suffer from the instability. I’d urge your focus not to be on the statistics and particularly not on the averages such as the factor of 1.5 I used here, meaning you just look at the factor saying freelancers tend to earn 50% more than those working day jobs.
Instead, create a high-value offering as your core business and fine-tune it to perfection as fast as possible. Make high profits on your base freelance work, and use the excess intelligently to produce income of different types. Diversify. Traditional investment, scaling up your business, starting small side hustles that take little if any of your time, or build a business that runs on its own serving your good-old clients whose trust you’ve already earned… are these all viable options. Just pick what fits your skillset and ambitions best and what your earlier career enables easiest. And the list here is non-exhaustive. There are so many ways!
Some even manage to productize their skills in a form of a book, an online course, a YouTube channel, or something that reaches a lot of people without spending any personal time on it. Get there, and you’re covered… in the best case, for life! 😉
There is one obvious implication of all this: You should not start freelancing if you can only do the same work as a normal employee! You have to be able to do more. You have to think like a solopreneur about what you can deliver to whom and only focus on those clients who can and are happy to pay multiple times the pay their “normal employees” get.
You have to play it right from the start!
Next, take a look at how to think about your expertise and how to build your business using your unique expertise as its core. Go through Freelancing – It’s an Expert’s Game. Then, one beautiful day, you might realize you just made it to the 5X class. And you did it without NASA’s help! 🙂