A few months ago, a solo software developer told me that he had decided to “grow his business”. Toward that end, he decided to hire two full-time developers.
A few months later, he excitedly reported to me that was already on track to double his annual sales numbers.
Then I asked:
“Okay, but… didn’t you nearly triple your costs?”
What is growth?
Let’s talk about what it means to grow a software development business:
- Hiring more employees is not growth.
- Renting a bigger office is not growth.
- Landing a gigantic client is not growth.
- Increasing your annual revenue is not growth.
So what is growth? In my opinion, there’s only one true measure of growth for self-employed software developers:
Growth is increasing your profits.
Profit is the only meaningful measure of business growth. Everything else is at best a leading indicator, and at worst a vanity metric.
Think about it…. If you don’t increase your profits, how will you ever make more money and/or work less than you do now?
What is profit?
In the simplest terms, profit is the amount of money left over after you subtract your costs from your revenue.
If you bill by the hour, you probably don’t normally think in terms of profit. The tangible costs of running a software business are so minimal – a computer, a phone, maybe a SaaS or two for project management and cloud storage. It’s all trivial compared to the revenue, so it can seem like pretty much every dollar you bring in is profit.
But you’ve missed the big intangible cost:
Ask yourself this:
How much money would be left over if you paid someone to do all your client work?
Would the left over amount be enough to live on? Enough to invest back into the business? Enough to create a nest egg or a rainy day fund or pay for a three-week vacation in Bali?
Until you start thinking in terms of increasing your profit margins, you’re going to remain on the feast/famine hamster wheel.
How could you possibly expect to get ahead if you’re systemically operating your business at or near cost? Without profits, you can’t grow a business like this.
How to increase your profit margins
The quickest way to increase your profit margins is to stop trading time for money. Instead, look for services that you can package and sell like products.
Create a sales page for each on your website that has a fixed published price, a guarantee of some sort, and a singular call-to-action as a next step.
Pretty much just like the product page for a lamp on target.com. No joke.
The beauty of product sales (even when it’s really a service packaged as a product) is that you can optimize every aspect of the marketing, sales, delivery, and support.
Guess what this does?
This allows you to decrease your costs —In other words, you spend less time working. Which increases your profit margins.
Guess what else this does?
This allows you to increase your prices —With repetition, you get better at delivering more value to bigger clients more quickly. Which means that you can raise your prices without scaring away prospective clients. This also increases your profit margins.
Hmm… decreasing costs AND increasing prices…
Sounds good, right?
It IS good, but it’s not easy. It requires that you make a huge mental mind shift from trading time for money, to pricing the outcomes of your intervention.
In order to escape the hamster wheel of running your business at or near cost, you need to start selling your outcomes, not your deliverables.
To learn more about how to escape the trap of trading time for money, check out Jonathan’s podcast Ditching Hourly, listen to him on The Freelancers Show where he is a regular panelist, or subscribe to his free Value Pricing Bootcamp email course. Jonathan’s latest book Hourly Billing Is Nuts is available now.