June 22, 2024

Pay vs Profit

Most freelancers and solo consultants I meet don’t have a good intuitive understanding of profit.

They confuse their pay (i.e., as the sole EMPLOYEE of their business) with their profit (i.e., as the sole OWNER of the business).

Why?

Because they always forget that their pay is an expense.

Think of it like this:

If you landed a project with a new client and then paid someone who was just as good as you to do the project while you did nothing, how much money would you have left over?

My guess is very little.

Let’s use some made-up numbers to make this a little more concrete:

• Price that the client agreed to: $100k
• Cost to hire someone just as good as you to do the project on your behalf: $90k
• Profit left over for you as the business owner: $10k

With all this in mind, let’s return to the idea of agreeing to a discount...

If you discount your price, the discounted amount comes straight out of your profits but does NOT decrease your costs.

So, in the $100k project scenario above, giving the client a 10% discount COMPLETELY ERASES YOUR PROFIT!

And guess what?

A business with 0% profit is not a fun business to run.

Yours,

—J

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