Freelancers: How To Calculate Your Breakeven Point With 4 Simple Concepts
Editor’s note: This is a contributed post by Mark Mikhail, an MBA & MScIB graduate, who is on the board of directors for Dark Soil (non-profit). He is also a marketing and advertising enthusiast. His passion for multimedia, strategic marketing, and food make a dangerous combo.
It’s a dream of many seasoned and aspiring freelancers to reel in a big client. However, sometimes that good dream, once it becomes a reality, can turn into a nightmare. Freelancers who bid on a Request For Proposal (RFP), may not have evaluated properly how much it takes to get the job done (and still turn a profit in the process).
Have you ever come across a project bid so low that you wonder if the bidder actually needs money to survive? It can be so easy to lower your bid in the hopes of scoring a client (and sticking it to your competition).
However, the problem is that some freelancers don’t really know what their breakeven point is, and they become lost in the emotions of competition. It’s really a lose-lose situation when you think about it. So to avoid falling into that trap, there are 4 simple concepts you need to objectively evaluate before bidding on a project.
Recommended Reading: Freelancers: How To Raise Your Rates
1. Fixed Costs
Knowing the costs associated with your services is a good start. For a freelancer, one should understand what fixed costs are. Simply put, these are costs that don’t change and are a one-time fixed expense. For email marketers, it could be an annual subscription to excellent newsletter templates or useful business apps for your iPad.
You can also include what you want to pay yourself. Yes! The money you want to make, after all other costs, can be included as a fixed cost. What is realistic, is up to you. Some freelancers like to pay themselves $1 million, adding it to their fixed costs.
2. Variable Costs
Variable costs are costs that change. Factoring variable costs into your bid, for a large project, is very important to make clear.
Let’s jump right into an example: for a social media freelancer, using HootSuite can be the content management system (CMS) of choice. Keep in mind, that for every account added to help manage social media assets, there is an additional cost. These costs can spiral out of control if you don’t evaluate how they are influenced.
3. Your Contribution Margin
Consider Darth Vader. In making the Death Star, he had large fixed costs and needed to know how they will be covered. His contribution margin tells how much money goes toward covering those fixed costs, after variable costs are taken care of.
Recall what you wanted to pay yourself can be added to your fixed costs? Your contribution margin shows how much money goes towards meeting that goal. To get the contribution margin, subtract your total variable costs from the expected revenue from the project.
Contribution Margin Example:
Take the example of an email-marketing freelancer who designs custom mass mail campaigns. The variable costs can be $0.15 per campaign and the money charged per campaign will provide $50.00 in revenue.
Therefore, the contribution margin is $49.85 ($50 – $0.15 = $49.85). That means for every campaign completed, $49.85 is contributed to covering fixed costs.
Your Death Star is almost complete, Lord Vader!
4. Breakeven point & Bid Adjustment
The breakeven point shows the least of what you need to produce, in paid work, to keep a roof over your head. This lets you know how competitive you are against other freelancers, and will help you to adjust your bid to stand a better chance of getting the job.
If you are not happy after looking at your breakeven point, look at what costs can be cut or optimized. If both fixed and variable costs are properly evaluated, the breakeven point will be pinpoint accurate.
Recall that contribution margin we got from subtracting our variable costs from the price charged per email campaign? To get your breakeven point, take your fixed costs and divide by the contribution margin.
Here’s An Example:
What do I want to bid on an RFP project which is asking for a proposal bid on 15 custom-designed mass mail campaigns? If I normally charge $50 per campaign, I need to know how many custom mass mail campaigns I need to sell to breakeven. Once determined, I can choose to lower or increase my bid.
Step 1: Get Breakeven Point
Here’s how I crunch the numbers:
- Fixed cost: $650
- Variable cost is $0.15 per campaign
- Contribution margin: $50 per campaign – $0.15 (variable cost) = $49.85
Breakeven = fixed cost / contribution margin
= $650 / $49.85
= 13 campaigns or clients.
Step 2: Determine Profit
Since I only need 13 campaigns or clients to breakeven, I can bid $50 per campaign for the requested 15 custom designed mass mail campaigns. The numbers now are:
- Fixed cost: $650
- Variable cost = 15 x $0.15 = $2.25 (for 15 campaigns)
- Total costs: $650 + $2.25 = $652.25
Hence the Profit made would be $750 (total revenue) – $652.25 (total cost) = $97.75 (net profit).
Step 3: Adjusting For Bid
Alternatively, I can try and make a more competitive bid to get a new client and increase my chances of getting hired for the project. I can charge $43.48 for each of the 15 campaigns and breakeven at $650 on the first project, in the hope of repeated business in the long term.
Any bid lower than $43.48 will result in losses.
Project bidding on RFPs is a way of life for freelancers. Being able to compete in the long run is important to your survival. Therefore, understanding your fixed costs, variable costs, and breakeven point brings more power to you.
It can be easy to lose yourself in guesswork and apply abstract thinking to your finances but leave the abstract thinking to your creative work and apply these 4 simple math concepts to your bids. By following these concepts, it’s just a matter of time until you are rolling in the green.
This post is published by a Hongkiat.com staff (editors, interns, sometimes Hongkiat Lim himself) or a guest contributor.