Episode 37: The Creative’s Struggle With Profitability

Since creatives tend to maintain rates much lower than other professional services their profits are pretty slim. But the idea of raising your rates can be scary if you think your clients won’t be willing to pay them. But assume for a second that they would—might you still be reluctant to charge what a lawyer or accountant charges? Might there be other reasons creatives hesitate to push toward profitability? Might there be other factors trapping you in cycles of unprofitability?

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Why do creatives have such a hard time making their business model work? Come to think of it—what is the creative service business model? The creative service business model falls into the broader category of professional services—similar to that used by lawyers, accountants, consultants and many others. The professional services model typically sells services using an hourly rate. That rate, when it comes to lawyers and accountants can be quite high, whereas the average rates for creative services, in comparison, are pretty low. Lower rates mean lower profits. So if you want more profit, you’re simply going to have to raise your rates.

Since creatives tend to maintain rates much lower than other professional services their profits are pretty slim. But the idea of raising your rates can be scary if you think your clients won’t be willing to pay it. But assume for a second that they would—might you still be reluctant to charge what a lawyer or accountant charges? Might there be other reasons creatives hesitate to push toward profitability? Might there be other factors trapping you in cycles of unprofitability?

Laying aside the fears that increasing your rates will decrease sales, I want you to consider other barriers you might be facing, other sources of resistance to achieving profitability. Some of the challenges you’re facing aren’t external—such as a client’s willingness to pay—rather they might be internal—your unwillingness to ask, because deep down, you yourself might not be convinced that worth it.

Sometimes creatives undercut themselves, even when a client might very well be willing to pay more for your services. When it comes to negotiating, creatives tend to use price discounts as a sales tactic, rather than playing hard ball—seeking to capture as much profit as possible. This tendency in selling, may be driven as much from desperation to close as it is from a distaste for maximizing profits. It’s easy to imagine a lawyer deploying aggressive bargaining tactics to negotiate for maximum profits—but put a creative into that picture and it seems absurd. To most creatives, hard bargaining just feels wrong, doubling or tripling your profitability, even if a client would agree, just doesn’t sit well. Until this discomfort is fixed, you’re not even going to attempt to significantly increase your rates.

In order to help you bolster your confidence—so that you’ll at least begin planning to increase your rates—let’s consider the connection between profits and value. When you understand economics 101 you know that the price of any product, or service, is ultimately determined by what the market is willing to pay. And that willingness is determined by the value they perceive, as well as the availability of cheaper acceptable substitutes or alternatives. When a buyer factors in all of these considerations, if they perceive value that they need and want, and there’s no lower cost acceptable substitute, they will be willing to pay whatever it costs, to get that thing that they value more than keeping the money they have to buy it with. But if they’re perception of value is low, then they will bargain shop.

So, really your profitability is a function of your value. Do you believe that your services are valuable? How valuable? Do you have something to offer that you don’t think can be easily replicated by any number of alternative creative services? If you have value, you ought to be striving to see that value expressed in terms of profitability. And so long as the value is real, you should not be at all hesitant to negotiate for the appropriate level of profit that corresponds to that value.

Unfortunately, when an entire industry perpetually undercuts itself, and valuable services are routinely sold under market prices, it does make it harder for everyone else in that industry to elevate the value of their services. One of my goals in this podcast is to call upon creative entrepreneurs everywhere to recognize the value their businesses provide and act more professionally—especially in how they negotiate their prices—in a way that matches our value as creatives.

This won’t change overnight, and so in the meantime you’re going to have to work even harder to demonstrate and prove your value—but when you have, don’t undermine yourself, and all your peers, by retreating back into fear, and discounting rather than elevating your prices.

Until next week: don’t let the business of creativity overwhelm your creative business.