So you’ve launched your own creative business, and you’re starting to grow. That’s great! But good growth won’t just happen. Just like a junior designer starts with small projects and slowly builds her skills, a new business needs time to mature, test new ideas, and prepare itself, too.
How did you gain the design chops that got you where you are today? With study, practice, and testing, I imagine. Business owners learn their trade the same way: by taking general business wisdom, applying it to their specific niche, and working diligently until they get it right.
If you want to grow in a sustainable, satisfying way, then you need to pay attention to how you’re growing, not just how much. After all, a bigger company isn’t necessarily a better one. Let’s look at four common pitfalls of growth in the design industry, and how to avoid them.
The wrong clients#section2
As a business owner, you might assume you should serve everyone you can. Busy is good, right? In reality, taking on every client who’ll hire you is actually detrimental to your growth, and not strategic at all.
The more bad clients you try to serve, the less time you have to look for good clients. This is dangerous. It’s like feng shui: You have to move the bad ones out so the good ones can come in.
But what makes a good client? Your goals and expertise might give you more specific criteria, but all good clients share three traits:
- They understand your value and let you remain in control of the design process as the professional.
- They are enjoyable to work with.
- They are profitable.
Firing clients (further, keeping the wrong clients out of your company in the first place) is one thing that sets strategic business owners apart from those who struggle through growth. This is a little scary to implement, but letting the bad clients move on to another home will be one of the most important things you can do to grow your company—and not just because they take up time.
Whether your clients are good or bad, you can bet that they will send you more clients just like themselves. If you give discounts to one client, then new clients could show up at your door looking for discounts. On the flip side, if you are treating clients well, doing good work, and getting paid well for it, then new clients will show up expecting to pay for the privilege of working with you.
Growing with the wrong clients is unintentional growth, and it actually hurts your good clients, too. When you are loaded down with clients you can never please, you can’t give enough attention to the very clients that will appreciate your excellent service. And when a good client doesn’t understand why you can’t find time to return their calls, they will leave.
Hiring for hiring’s sake#section3
You might think that staff growth is good, but size alone is no strategy. Hire employees to serve great clients, rather than taking clients in order to pay employees.
Growing to simply reach a size often puts you in the poor position of having to farm out busywork to unchallenged employees. Busywork blunts an employee’s passion and makes her wonder if she is doing anything of value—beyond bringing another dollar into your business, that is. It’s hard to get excited about work like that.
Bad clients and busywork lead to high employee turnover—because your best employees know they don’t have to put up with your poor decisions. And employee instability can, in turn, atrophy your client list. Give the employees some control over whom your company serves. For example, if you have a method of tracking all incoming new client requests, go over these with your team in a weekly meeting to flesh out who would be good for your company. Or, share your “good client” criteria with your team, ask for their input, and discuss whether everyone currently on your client roster fits the bill.
Including your team in these intimate parts of your company will make talented employees more passionate and happier. Happy clients will be the result!
Employees long for a business owner who manages growth strategically. One way to bless your employees and feed their passion for their work is to focus on a niche. This will in turn mean you must hire the right team to work on that niche. Niche work, as opposed to serving anyone anywhere, lets you hire the best designers, who expect better work conditions, higher pay, and more creative freedoms—passionate professionals who want to work with only the best clients.
Growing too fast#section4
Newer design companies often struggle to manage their tacit, undocumented knowledge—like where files are stored or how project handoffs happen. When your company is new, it’s challenging to maintain developed systems that can handle large amounts of growth in small periods of time. Along with nurturing great designers, take time to develop internal systems like mature project management systems and wise account managers.
Every time you onboard a new customer, you will add to your tacit knowledge about your pricing and your customer experience processes. You need to be able to apply that knowledge to the next client you bring in. This is hard to do when you are growing too fast. If you are a new owner, fight to keep your growth slow. Once you have more mature systems, you can pick up your pace.
Once you reach a certain level of size, you also need more help to grow. This can be a surprise to many business owners. More specifically, once you reach somewhere around five to ten employees, non-owner leaders need to be identified to help you continue managing the work and the growth. Now your company needs to continue its growth, often without the owner controlling the full process. Your internal processes will be tested during this phase. As an owner, you must transition out of technical work so you can be available to move into a role of leading and coaching your team as they take on new roles in helping the company grow.
Since you need to hire the best employees and can’t afford to let customer service slip while you do it, you’ll also find you need to hire new people just before you need them. But in order to hire early, you’ll need precious cash on hand to buy enough time to find the right clients to match your new hires. If you don’t have the cash reserves to get through this adjustment period, then you could be overburdened with a huge payroll and not enough of the right clients to pay it.
Low margins#section5
High-margin work frees you from stressing over the basic needs of the business—like worrying about making payroll, or paying contractors and vendors on time. A profit margin is the total amount your client paid you, less the specific salaries or contractors needed to produce the work, less the products or additional services you had to purchase to serve the client. Profit margin is different from gross revenue. Profit margin is a minimalistic view of how profitable each job is. Gross revenue, on the other hand, is the total income your company is making, before accounting for costs.
In the profit margin calculation, ignore insurance, rent, taxes, and all of the stuff you can’t do anything about. These expenses do not factor into the calculation of a profit margin, because you can’t control them. Just focus on the few controllable costs needed to perform that specific job for that specific client. Low-margin work means you are pricing your services too close to the costs you’ll have to bear in order to serve that client.
For example, if you price your services at $100,000, and your salaries and contractors cost you $80,000 and your miscellaneous costs (fonts, hosting, and stuff like that) are $5,000, then you are dealing with a small profit margin of $15,000. This is a 15 percent profit margin. Is that enough? That is something you must decide, but I can tell you from experience that the smart design businesses my accounting firm works with are experiencing between 70 and 90 percent profit margins, and I would expect at least a 50 percent margin from our clients.
Margins matter. Low-margin work could have unintended consequences, like leaving you in debt to cover living costs and the owners’ salaries. This is very dangerous. Though it is a fearful thing to do at first, pricing your services high enough to fund profitable growth, and being committed to high-margin growth, will help your design company prosper.
Committing to only taking high-profit work also lets you offer attractive salaries, provide good workspaces and tools, and invest in employee education. In essence, you can’t build the world-class team you need without high profit margins.
Good growth can be yours#section6
So maybe you’ve grown, but have you prospered? Not if you’ve allowed your company to be sidelined by the four growth pitfalls above. Growth doesn’t happen by default. It can only happen by design. It takes a lot of work, and demands keeping your growth patterns in check every step of the way. Be watchful for the pitfalls and run the other way. Your clients, your team, and your profitability will thank you.
Riffing off this post, as a web developer I’d love to see one about forming collaboration partnerships, e.g. developer-designer.
“Hire employees to serve great clients, rather than taking clients in order to pay employees.”
When clients leave though, you’re still left with employees to pay. So taking on clients to pay employees seems like an eventuality to me.
@Collin Garvey – an alternative, at least at the outset, is to recruit on a per-project basis. It’s not sustainable long term but when you’re only working on 1-2 projects per year it can help you cater your approach to the great client you’ve just landed.
Hey everybody, thanks for reading!
@Yitzchak Legal partnerships don’t always work out too well, but it really just depends so heavily on the dispositions of those joining together. They can work, it’s just hard. But working as a contractor for a Designer is similar to a partnership, you just don’t have to worry about all that legal crap, but can still serve clients together.
@Collin You are right that hiring (or growing any business for that matter) is a risk. If you lose clients then you might need to fire employees. It’s the risk you take. This article is for those in a growth trajectory. If you are not growing, or are losing clients, you definitely don’t need to be hiring.
@Jonathon I agree, most people just hire contractors for a while until the need for a full time hire can no longer be avoided. Then they take on the risk of an employee when they have the clients and revenue to cover the new payroll costs.
GREAT Stuff. I’ve been around and around with this. I think I’ll have to read this article every day.
I think this is very applicable to 1-person enterprises, as well. I run a small computer repair/software remediation/data rescue business and constantly find myself bogged down with unprofitable or bad customers. A bad customer is one who repeatedly refuses to implement good advice. I am starting to decline work from such customers because it is time consuming for me and almost always unprofitable. I want to focus on just the clients that offer me interesting challenges and can afford to pay very well. Trying to help everybody is a low-profit deal. The points you make in this article really resonate well with me. I don’t expect to ever “get big” as a business, but I hope to snag some profitable and interesting projects in future years.
This post is spot on. I would just like to add that remember the 80-20 rule in a web design studio business. 20% of your clients are generating 80% of your profit. Find out which ones these clients are and make a strategic plan to offload the others that are not very profitable, this will ensure the right kind of growth and profitability. There are many other 80/20 rule examples…
Jason, when calculating margins, we’ve always accounted every expense, no matter what. That includes some of the things you say to exclude. Is there a full list of things to exclude from the margins calculation that we can use?
Thanks!
Great post- Thank you.
Jason, thanks for sharing your valuable experience. I’m trying to grow my business, but the right way like you said. I’m providing premium value for a premium price, so this means a lot of people can’t afford me.
The problem for me is finding the people who can afford me, and kindly turning away the people who can’t. Seems like I’m always hunting clients down…
Great post Jason, I came across this article yesterday, but just had chance to read in depth. As a person in this very position, starting a small agency I can relate to all of the points in the post. My main issue is at the moment getting the monthly client work done to pay the bills is consuming alot of time, so getting started on company and sorting out my personal sites are yet to get love… Any advice on free up time or betting working methods?
Really appreciate your mention of specific profit margins. I have been wondering what is reasonable and what I should be able to ask for… and what I need to thrive. Thank you!
I think our graphic designers building their sites using Webydo’s online professional platform will find this really useful. I’ll send out a FB post and tweet with this article. Thanks for the terrific post! 🙂
@stephan The editors and I tried to make the explanations of margin clear, but it was hard. Here is what I was trying to convey:
Total Revenue
-Costs directly related to serving the client
=Profit margin
-Costs NOT directly related to serving the client
=Net profit
So, for accountants like me, there are really two different types of ‘profit’ you can track – one is called ‘profit margin’ and it is one I want our clients to understand the most. The other one is ‘net profit’ and it is what you have left over after deducting EVERY expense.
Stephan, you may be talking about ‘net profit’ while I am talking about a ‘profit margin.’
I like to talk about a ‘profit margin’ because it gives you a clearer picture of how profitable your client work is. Honestly, the comments section may not be the best place to try to describe this.
@Raouf Thanks! Glad you enjoyed the post.
@Caleb Great! Remember that price always trails value. Don’t lead with price, lead with value to the customer and let the price follow. Value exchange between you and your client is the main thing to consider in serving your customers. Often times we feel our value is larger to the client than it actually is. Experiment with your pricing by lowering it a bit to see if obtaining clients is any easier. Ask yourself these questions:
-how do you know you are valuable?
-is your price higher than your value?
-who really determines what value is, you or your client?
-does your client feel like they are receiving adequate value for the price you are asking them to pay you?
-are you keeping your referral sources informed as to how you are changing and growing? Are they referring ‘low margin’ clients to you?
-are you serving a niche, or do you feel your ‘brand’ precedes you?
-what is the gateway by which your client contacts you? A contact form? A skype meeting? A meeting in a coffee shop? (all of these can affect price)
-how do you make money? By offering a price up front before work is begun? Or after work has been completed?
-Is your price on your website?
Making larger margins is intricate, and pricing is the strategy to do it. Attend this conference to see my longer workshop on the Intimacies of Pricing Your Customer: http://bit.ly/VItHqd (in Vancouver).
@Mathew, sounds like a good problem to have! “Cash is King” as they say in business. Stay focused on those paying you, and keep delivering value so you can keep getting paid. You are running your business to make money, so stay focused on that for now.
Question: why do you want to focus on personal sites? I imagine the answer would be so you can get more clients (just a guess). But it sounds like you are already serving clients! Keep serving.
Building new sites should be an effort in branding, which is a more mature stage of growth. To do that, you will probably need to delegate some work to a new team member. But of course, you can’t do that until you have high profit margins, with cash in the bank.
Don’t stress out too much over your own sites. It IS important – I’m just saying getting money for groceries, toilet paper and beer is more important. You feel me?
Very informative and interesting stuff. I love to learn more and more about website design as it helps me understand when in my meetings with my design firm. They have done wonders for my companies page and I highly recommend them. Check out what they have to offer for you: http://www.roimedia.co.za/web/design/
Great!
So true, but so hard to stick to when you’re starting out. Turning down bad clients is something I think people have to learn the hard way. I certainly did! Also, you sometimes don’t even realize they’re bad until you’re half-way through the project.
A great article. Thanks.
I agree with the IDEA of not taking bad clients, but in slow months, it’s a REALLY difficult decision. so, on occasion, I do it, and 80 percent of the time I regret it, but it makes me appreciate my good clients that much more.
I can honestly say that I’ve fallen into every pitfall listed above. I’ve lost money, time with friends/family, sleep and opportunity. I tell myself that these are growing pains. These are the trademarks that I’ve earned by being a business IDIOT, and blowing shit up. Yes, I’ve kicked my business in the balls, but I’ve learned a ton.
What might you say about the importance of networking for growth? A lot of us get locked down in our production caves. It’s hard to produce and to procure business at the same time.
What might you suggest about mentoring? These growing pains are seldom unique.
Rad article. Stay awesome JB!
Thanks for this post Mr. Blumer. I relate on all levels as I have had my fair share of both terrible clients and employees.
A recent read of Good to Great illustrated the need to hire great first and foremost. In my opinion great is:
1 – Passionate
2- Sharing of values
3- Extraodinary effort and capacity.
As far as clients go, I have become way more selective and prefer early adopters – these clients may not understand the technology nor design as well as you do but are just as excited as you are about getting it done the right way.
An excellent article…we have discovered many of the same things during our first 4 years in business. I wish you would have written this article 4 years ago, haha.
Out of curiosity upon discovering you have a “bad client” how do you for lack of a better phrase “Dispose of them”?
Great post – a lot is said in having a great client and if that great client refers you, that usually means more great clients! At times we have to deal and accept those bad clients and take it as a learning experience.
Wao! This is quite helpful cos I’m about to start my own design company and I need to know all it takes to grow. I truely want to build a business and not just to make money. Thanks for this
It’s Great!!!
Thank you Jason! You are super!
Great post. I’ve been managing my own little web design studio for almost ten years and I always saw growing as a very risky process.
I decided to stay small so I don’t need a big amount of clients or bigger ones. I feel comfortable with small or medium size projects so I don’t need to low the level of quality because I need to take in more and more projects to keep a large staff organization.
Collaboration with other designers/developers is a good approach when big projects or clients show up.
I can agree to your points. These are practical insights for running a new creative business. Growth and success do come at a price and it takes years to know these finer nuisances.
This is excellent advice for those of us getting started. I tend to focus too much on the design and production side and not enough on the business mechanics. Thank you for a great read.
@Bernard, you ask how to fire clients. This is the strategic process of ‘pruning.’ Those who prune regularly will grow their business more profitably than those who do not. I’ve experienced this, and many of our clients have too.
First, finish your projects with them. You owe that to them.
Second, call them and have the conversation with them. I usually explain it this way,
“Hey [client], I wanted to call personally and talk to you about how our company has been changing over the past year. We’ve become more focused on the type of business and clients we are seeking to serve. We’ve discovered that we are best for clients that are [in a certain niche] and [allow us to do this service for them]. To that end, our pricing has had to increase to accommodate the new value we bring to clients. We have set a new minimum price to work with clients from here forward, and it is [$xx,xxx]. From here forward, we will have to work at this price level to do work together.”
This takes guts, but you owe it to your other clients to have these conversations with the bad clients. They are uncomfortable conversations, but you MUST have them to experience grow in your company.
Another note: these conversations don’t typically end in the client saying, “Wow, you guys are so awesome. You know exactly whom you want to serve and I’m thankful you let me know.” They will more than likely not appreciate the conversation, and will leave. And that is the goal.
Those who are brave enough to have these conversations will be able to further grow their creative company.
@Benjamin Sup dude? Long time no talk! Thoughts on your questions (understanding that I am always learning and continually getting my MBA on these subjects):
Our creative clients that know a lot of the RIGHT people are the ones who are growing, and growing profitably. But to have time to network, you must price your current services high enough to allow for margins that are healthy enough to allow you to attend conferences, meet with others and read books.
Fix your price first, then you’ll have freedom to network.
As far as mentoring, I’ve had a coach for over 8 years and regularly meet with others who sharpen me. It is the one factor that has changed me more than any other. The clients who pay me to coach them are the ones making more money than other people. I hope it’s because of my coaching! But that is probably not the full story. People who see value in coaching and mentoring have simply realized that having other people in your life are what will make you successful.
Having a client that can trust you and your expertise is essential, otherwise you end up just doing and not thinking. This in turn can be soul destroying and will start making you resent what you do. Don’t let the scale of the client influence you either; I would rather do interesting work for a lesser known client that appreciates my craft and knowledge than work for a bigger client, only to be a conduit.
Good post, all of which I agree with. A lot reminded me of How to be a Graphic Designer Without Losing Your Soul
Another good idea is to not focus on all types of business but instead try to find a niche. The tricky part is finding out which niche is right for you and establish yourself as a professional in it.
“Committing to only taking high-profit work”
What if everyone commits to this? Will very small businesses in the states need to outsource to 99designs and the like? What about businesses in countries that can’t outsource?
I know this is beyond the scope of the article, but many of my clients are plumbers, non-profits, or food carts – do they have to just do without a knowledgeable designer/design shop?
Not all clients are bad clients. There are many more bad designers with bad practices than bad clients.
Great article!
Not too much here about forming partnerships, growing a network and planting seeds to get new business though (which is something that is very important to the actual growth)
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