Latest / Freelance Careers with Fexingo: Independent Work, Consulting, and Self-Employment / How Freelancers Can Use a Client Profitability Analysis
Transcript
- Lucas: I want to talk about a number that most freelancers cannot tell you off the top of their head, and that is how profitable each of their clients actually is. Luna: Not just how much a client pays you each month, but whether that payment is actually worth your time? Lucas: Exactly. The distinction between revenue and profit is obvious in theory, but in practice, freelancers tend to look at the top line and assume the rest will take care of itself. So I want to walk through a specific case. Luna: Okay, hit me with it. Lucas: I was talking to a freelance copywriter last month—she had a client that paid her $8,000 a month on a retainer. Sounded great. But she was also doing two rounds of revisions that weren't in the scope, answering Slack messages at 10 p.m., attending weekly status calls that always ran long, and managing a junior point person on the client side who didn't really know what they wanted. Luna: So the retainer was covering the base work, but the actual work was way more. Lucas: Right. So we sat down and tracked every hour she spent on that client for a month. Not just the writing, but the emails, the calls, the Slack pings, the revisions. It came to about 210 hours. Her effective hourly rate for that client was just under $38 an hour. Luna: That's less than she could make at a lot of part-time service jobs. And way less than her standard rate of, I'm guessing, $100 plus an hour? Lucas: Exactly. Her standard rate was $125 an hour for project work. But with this retainer client, she was effectively subsidizing their inefficiency. And that's the thing—most freelancers don't realize they have a client profitability problem until they run the numbers. Luna: So let's walk through the actual formula. If I'm a freelancer listening, what do I need to calculate? Lucas: You need three things. First, total revenue from the client over a set period—say a month. Second, total time spent on that client, which includes everything: billable work, but also internal meetings, emails, proposal follow-ups, even the time you spend thinking about their project while you're in the shower. Luna: So you need a time tracker, and you have to actually use it. Lucas: Absolutely. Toggl, Clockify, even a spreadsheet. But you have to log everything. Then third, you need your overhead costs per hour. That's your software subscriptions, your health insurance, your coffee, your laptop depreciation—everything that keeps your business running. Divide that by the total hours you work in a month to get your overhead rate per hour. Luna: And then your true profit per client is revenue minus? Lucas: Even simpler: take the revenue, subtract the total hours multiplied by your target hourly rate. If your target rate is $100 an hour and you spent 210 hours, that's $21,000 of your time. But you only got $8,000. That's a loss of $13,000 in opportunity cost. You would have been better off doing project work at your standard rate. Luna: That's a stark number. And it explains why so many freelancers feel burned out even though they're booked solid. Lucas: Exactly. The feeling of being busy but not getting ahead is usually a client profitability problem, not a volume problem. So once you have these numbers, you can set a minimum profitability threshold. Luna: What does that look like in practice? Lucas: I advise freelancers to decide on a minimum effective hourly rate that they will not go below for any client. For example, if your target is $100 an hour, then any client that comes in below $90 after you factor in overhead is a red flag. You either renegotiate the scope, raise the rate, or restructure the engagement. Luna: And if the client won't budge? Lucas: Then you have to consider firing them. And I know that sounds scary, but when I worked with that copywriter, she ended up dropping that $8,000 client and replacing them with two project-based clients at her standard rate. Her monthly revenue actually went down by about $1,000 initially, but her effective hourly rate doubled and her stress dropped significantly. Within three months, she was making more money than before because she had time to take on better projects. Luna: I've had a similar experience. I used to have a consulting client that paid a flat monthly fee, but they required a lot of hand-holding and last-minute requests. I ran the numbers and realized I was making about $45 an hour after all the extra work. I had a conversation with them about raising the retainer by 25 percent to account for the additional scope, and they actually agreed. Lucas: That's the ideal outcome. The client profitability analysis gives you data to support the conversation. Instead of saying 'I feel undervalued,' you can say 'Here's the actual time I'm spending, and here's what my effective rate is. To make this sustainable, we need to adjust the fee or the scope.' Luna: And if the client respects you, they'll usually work with you. If they don't, that's a signal in itself. Lucas: Right. So I want to give listeners a simple homework assignment. This week, pick your top three clients by revenue. For each one, track every minute you spend on them for the next seven days. At the end of the week, calculate the effective hourly rate. Then compare it to your target rate. I promise you will learn something. Luna: And if you find a client that's below your threshold, what's the next step? Lucas: First, don't panic. Look at the pattern. Is it a one-month anomaly because of a big project? Or is it consistent? If it's consistent, you have three options: renegotiate, restructure, or replace. Renegotiate means asking for more money or tighter scope. Restructure means changing the engagement model—maybe a per-project fee instead of a retainer, or a cap on revisions. Replace means ending the relationship and finding a better client. Luna: And I'd add that when you do fire a client, do it gracefully. Give them notice, offer to help transition, and keep the door open for future work if the terms change. Lucas: Absolutely. Burn no bridges. But also don't burn yourself out for a client that's costing you money. Luna: It's interesting—we talk a lot on this show about raising rates, but the profitability analysis is almost a prerequisite. Without it, you're flying blind. Lucas: Completely agree. And I think that's a good place to mention something we don't normally talk about on the show. We keep this podcast ad-free because we believe the advice should be straightforward and not interrupted by commercials. But we only can do that because some listeners choose to support us. Luna: Yeah, if you've gotten value from episodes like this one—maybe it helped you raise a rate or rethink a client—you can support the show at buy me a coffee dot com slash fexingo. It's a simple way to keep the podcast independent and free for everyone. Lucas: Exactly. No pressure, but it means a lot. Okay, back to profitability. The other thing I want to mention is that this analysis isn't a one-time exercise. Client dynamics change. A client that was profitable in January might become unprofitable in June if they start adding scope or if your own costs go up. Luna: So you recommend doing this quarterly? Lucas: At least quarterly. I do it every three months for my own clients. I have a simple spreadsheet with tabs for each client, and I track hours and revenue for the quarter. It takes maybe 30 minutes, and it's saved me thousands of dollars by catching problems early. Luna: And if someone wants to get really sophisticated, they can also factor in the 'joy' or 'learning' value of a client. Some clients might be less profitable financially but provide great referrals or teach you a new skill. Lucas: That's a good nuance. The profitability analysis is a financial tool, not a complete life decision. But for most freelancers, the financial piece is the foundation. If you're losing money on a client, no amount of referrals makes up for that. Luna: So the takeaway is: know your numbers, set a minimum threshold, and be willing to have the hard conversation. Lucas: Exactly. And if you do that, you'll not only make more money, you'll also enjoy your work a lot more. Because you'll be spending your time on clients that actually value you.