Freelancing is a fantastic way of making money online.

The barriers of entry are low, qualifications are not a necessity and anyone with a relative level of skill and enough desire can build up a healthy income in a relatively short space of time. When one considers the lengths some people go to in an attempt to establish “passive” streams of income, freelancing is a dream option.

Having said that, freelancing does have its limitations. Perhaps the most obvious is the time-for-money issue: you’re only making money freelancing when you are freelancing. There comes a stage in any successful freelancer’s career when they realize that in order to grow any further, they must look to expand beyond the time-for-money business model.

Doing exactly that is what I want to discuss in this post.

Recognizing the Limitations of Freelancing

Ultimately, your ability to earn money as a freelancer is limited by two factors:

1. Available time
2. Your equivalent hourly rate

With the above in mind, let’s consider a hypothetical example of the limitations of freelancing.

The maximum amount of available time you have is twenty-four hours per day, but that of course is not sustainable. You have a life to live and you certainly need sleep if nothing else. So let’s say that you work eight hours per day. Over time you have built your equivalent hourly rate (based upon the total you earn (net) divided by all hours that you work over a certain period) up to a healthy $100 per hour (which you feel is realistically as much as you can make in your industry). You want to take a total of four weeks of holiday per year. Therefore, we can calculate your maximum potential earnings per annum as follows:

total time * rate = earnings

(8 * 5 * 48) * 100 = $192,000

That’s a very healthy living by anyone’s standards, but it is a ceiling nonetheless. If you feel that you have maxed out your rate and you are unwilling to work any more hours, your earnings will plateau. And no one wants to plateau, right?

Employees vs. Contractors

At this stage, the most obvious course of action is to take on employees and increase the scale of your operation. At that point you technically cease to be a freelancer and become a business, but I’m not going to get caught up in technicalities here.

It is a fine option, but one fraught with potential complications. In order to afford those employees you must take on extra work, and you’ll be working with a far slimmer margin (i.e. the cost of the job minus the cost of your employees). Furthermore, employees bring with them a raft of responsibilities and potential headaches.

So that route does not form the basis of what I am going to discuss here. Although you will probably need to take on outside help, I would strongly recommend that you work with contractors rather than employees. This affords you a great deal of flexibility and also allows you to apportion work amongst multiple specialized workers that might otherwise be handed over as a whole to one employee. That protects you from arguably the worst nightmare of employing: when they leave and you have no one left to replace them. By spreading the load across multiple contractors, you are far less likely to be left in a difficult situation if one leaves.

Furthermore, for those of us who dream of location independence, working remotely with contractors as opposed to in an office with employees is a far more attractive proposition. If you don’t think this is realistically possible, just ask the founders of 37 Signals — their award-winning and astonishingly successful team is spread across multiple timezones.

Pound for pound, contractors are typically more expensive to hire than employees, but they bring with them far fewer complications and a greater level of flexibility. I’ll take that every day.

Four Models for Business Growth

The beauty of the Internet is in its scale. It is a sandbox of near-limitless size in which you can test business ideas with relatively little risk. As a freelancer, your growth can be marked by small-scale experimentation leading to large-scale implementation, should your ideas prove fruitful.

With that in mind, I now want to cover four models for business growth that you can use as inspiration for taking your own freelancing business to the next level.

1. Branching Out

We are working on the basis that you have reached the ceiling of your earning potential in terms of your equivalent hourly rate. This ceiling is created by the age-old economic principle of supply vs. demand.

To overcome this barrier you must work to increase the perceived value of your service. You may find that you are able to carry out what amounts to very similar work for a different type of client and enjoy a higher equivalent hourly rate.

This ultimately comes down to client benefit — i.e. the positive effect your work will have on the client’s project. Say for instance you’re a website optimizer and you have been tasked by two clients to boost email subscription rates. If you boost subscription rates by 5% for a client with a website that attracts 100,000 visits per month, and by 5% for a client with a website that attracts 1,000,000 visits per month, to whom have you delivered the most value? The second client, of course. And that second client is probably willing to pay you far more than the first.

It’s not just about the clients that you work with though — it’s also about the shape of the solution you offer. As a freelancer writer I have seen peers slave away writing for celebrity gossip websites and the like, who rely upon a huge amount of content (and by extension huge traffic numbers) to sustain extremely modest advertising revenue (per visitor). If on the other hand you work with a client who sells high end hi-fi systems, your abilities can be leveraged to provide a much higher return for the client, which by extension justifies a much higher rate.

If you can shape your solution to provide a higher return to the client, they will be willing to pay you more. Once you understand this principle you can look to see how your services can be adapted to serve a higher purpose.

2. Outsourcing the Basics

If you adapt your operation into a “real” business by hiring contractors, scale is no longer an issue. In theory, you can scale limitlessly and become as big as you wish (should the demand be there).

However, scaling your service is more complicated than it may initially sound. As a freelancer you may have built your business around your own personal assets, which can be difficult to emulate. Finding reliable and talented contractors to produce work to a standard that is similar to yours can be difficult. This is especially relevant in particularly creative fields such as writing and design.

Therefore, the first and least painful step towards scaling is to begin outsourcing the more menial types of work. This has two benefits:

1. It is relatively easy to implement
2. You do not need to hire particularly skilled workers

I would always recommend that you scale slowly and gradually, and starting with the simplest work is the best way to do this. Doing so enables you to focus only on the elements of your work that require your unique skills and could boost your earning potential drastically.

You may find that you are able to outsource more work than you previously thought realistic — once you have a contractor on board who works in a reliable fashion, you may decide to make further inroads by outsourcing more of the work.

3. Scaling Your Service

True scale requires systematization of some sort. Or to put it another way, a business that is endlessly scalable must not have to rely upon the unique skills of one person (i.e. you). If you experience success in outsourcing the more basic elements of your workflow, it may be time to change the shape of your solution to provide something that can be emulated by contractors.

Consider for instance a freelance writer who attracts clients on the basis of her reputation and expertise. There is a clear limit in terms of scale inherent in the fact that the unique selling proposition of the business is based entirely upon an individual’s perceived worth. The solution would be to shift the shape of the service to focus more on quality writing in general rather than quality writing by an individual.

Such a transition does of course carry risk, but the potential pay-off is huge. If you can systematize your service offering (i.e. make it easy to teach and relatively linear in scope) then the potential to scale is practically endless. If on the other hand you stick to offering a more bespoke service, you will find it difficult to branch out beyond your existing limitations.

4. Commodotizing Your Service

All three of the above models rely upon greater working hours — whether they be your own or those of contractors that you hire. For some people, adding the layer of complication that is inherent in bringing in any outside help is something they’d rather avoid.

Under such circumstances, the best step to take in further developing a freelance business would be to commodotize the service. By this I mean essentially making a service a product.

Examples are potentially endless:

• A graphic designer could create a course that teaches people how to do graphic design themselves
• A freelance writer could create an online job board on which potential clients can pay to post their jobs
• A web designer could offer a semi-automated maintenance and backup service

The key here is in passive income and automation. While you will not be able to build income without doing any extra work, you can release yourself from the direct relationship between hours work and money received by creating assets that can generate an income for you — just like the above-mentioned course, job board and maintenance and backup service.

What you must do is create a single solution that can be resold or adapted to serve multiple clients (or customers, perhaps more appropriately) without you having to create something new every time. You deliver the same value, over and over again, while only putting in a fraction of the work. The client still gets what they want and you are able to make far more money while providing the same amount of value.

What Next?

I’m not going to pretend that any of the above models are easy or lack risk. But business growth is not generated by making safe decisions. If you do decide that you want to scale your business, you must do so on the understanding that there is inherent risk. However, as I have already said, the potential rewards are great.

As long as you take a gradual and iterative process towards business growth, your exposure to risk should be relatively small and the chances of a real disaster all but eliminated. But one thing is for sure — unless you adopt the concept of scaling and see beyond your own abilities and limitations, your business will stagnate.