When startup founders launch a new business they pour themselves into it, fueled by hopes and dreams of building a new multi-million dollar company. When creative entrepreneurs launch, they don’t imagine massive cash infusions from investors, or of taking their company public. There may be, and ought to be hopes for increased compensation, but more often than not creatives strike out on their own in pursuit of creative control, and better creative opportunities. Generally speaking, creatives run businesses as more of a lifestyle choice than as a business investment. But do creatives need to be content with mere income replacement, or can creative entrepreneurship deliver higher returns?
When creatives launch out on their own they soon face the hard reality that running a creative practice involves a lot more than simply producing great work. The challenges and intricacies of the creative services business model may cause them to wonder if they made the right choice. In many cases creative entrepreneurs end up earning less running their own businesses than they might working for another firm.
Though there are many challenges to creative entrepreneurship, it is possible to build a lucrative practice. Not Shark Tank level lucrative, but rewarding nonetheless—both in the work itself and as a profitable business.
But to make your creative practice financially rewarding you’ll need to master the business side of creativity. And this starts by understanding the constraints of the financial business model most creatives operate by—and the path to breaking out of its limits.
Creative services, like most professional services, are sold on a time and materials basis. As a result there are some built in limits on your total compensation, since you only have so many hours a day to bill, and so many weeks per year to capture revenue. What are these limits? Well let’s do some quick calculations based on time and hourly rates. On average, if you work a bit more than forty hours per week, and take four to eight weeks off per year you can squeeze around 1,500 billable hours out of a year. Another quick way to get at your total “time inventory” is to simply take all the work hours in a 52 week period and multiply that by the 60% resourcing benchmark I mention so often. Then just multiply that number by your hourly rate: if you charge $50 per hour you’ll tap out around $75k per year, at $100 per hour you can get up to $150,00 and at $150 per hour you’re hitting $225,000 a year—not too shabby. However, before you start making plans for spending all that revenue, you have to discount that by overhead costs, which on average will be at least 35% of your total revenue. That brings those revenue numbers down to around $50k, $100k, and $150, for those same three rate levels.
Of course these are maximums, based on strict hourly billing. If you have additional downtime, because you go without billable work for a while, that puts direct downward pressure on your maximum compensation.
While these caps exist for a time and materials practice, there are paths to exceeding these levels. Of course you can hire help and increase your time inventory—but keep in mind that this also increases your overhead. And unbillable downtime, against fixed employee salaries can seriously undermine your profitability—even land you in the red.
A better path is to move beyond the billable hour. If you can get to project fee pricing you gain the opportunity to capture additional margin, if and when your actual time spent, comes in under your fee. And that fee, though it should take your time and rates into consideration, does not have to be limited by those. Of course, fee-based pricing cuts both ways, if you go over your fee, then you effectively start discounting your rate and lowering your net revenue and profits.
Many creatives find fee-based pricing too risky, and so they content themselves with hourly billing caps. But if you practice PinPoint Positioning, and start building focused expertise, your ability to charge higher fees, and gain efficiency to boot, can open up the doors to significantly higher revenue and personal compensation from your creative practice.
Until next week: don’t let the business of creativity overwhelm your creative business.