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Guide: Calculating Breakeven Point: Tips and Guide
This article is part of us Guide to Freelancing series “ – consisting of guides and tips to help you become a better self-employed person. Click here to read more from this series.
It’s a dream of many seasoned and aspiring freelancers to bring in a big client. But sometimes that good dream, once it comes true, can turn into a nightmare. Freelancers bidding on a Request For Proposal (RFP), may not have properly evaluated how much it costs to get the job done (and still make a profit in the process).
Have you ever come across a project bid that is so low that you wonder if the bidder needs real money to survive? It could be so easy to lower your bid in hopes of scoring a customer (and stick to your competition).
The problem is, some freelancers don’t really know what their breakeven point is, and they get lost in the emotions of competition. It’s really a lose-lose situation when you think about it. So in order not to fall into that trap, there are 4 Simple Concepts You Should Evaluate Objectively Before Bidding on a Project.
1. Fixed costs
Knowing the costs associated with your services is a good start. For a freelancer, one needs to understand what fixed costs are. Simply put, these are costs that do not change and are a one-off fixed editionFor email marketers, it can be an annual subscription to excellent newsletter templates or useful business apps for your iPad.
You can also record what you want to pay yourself. Yes! The money you want to earn, after all other costs, can be included as a fixed cost. What is realistic is up to you. Some freelancers are happy to pay themselves $ 1 million on top of their fixed costs.back to menu ↑
2. Variable costs
Variable costs are costs that change. Considering variable costs in your bid for a large project is very important to make clear.
Let’s jump straight to an example: For a social media freelancer, using HootSuite could be the content management system (CMS) of choice. Please note that any account added to assist in managing social media assets will incur additional charges. These costs can get out of hand if you don’t evaluate how they are affected.back to menu ↑
3. Your premium margin
Consider Darth Vader. In making the Death Star, he had high fixed costs and needed to know how these would be covered. Its contribution margin tells you how much money will be spent covering those fixed costs, after taking variable costs into account.
Remember that what you wanted to pay yourself can be added to your fixed costs? Your contribution margin shows how much money is being spent to achieve that goal. To get the contribution margin, Subtract your total variable costs from the project’s expected return.back to menu ↑
Premium margin Example:
Take the example of an email marketing freelancer who designs custom mass mailing campaigns. The variable costs can be $ 0.15 per campaign and the money charged per campaign Earn $ 50.00 in revenue
Therefore, the contribution margin is $ 49.85 ($ 50 – $ 0.15 = $ 49.85). That means that for each campaign completed, $ 49.85 will be contributed to cover the fixed costs.
Your Death Star is almost complete, Lord Vader!back to menu ↑
4. Break-even point and bid adjustment
The break-even point turns out the least you need to produce, in paid work, to keep a roof over your head. This will allow you to know how competitive you are against other freelancers and adjust your bid to have a better chance of getting the job.
If you are not satisfied after looking at your breakeven point, see which costs can be reduced or optimized. When both fixed and variable costs are properly evaluated, the breakeven point is extremely accurate.
Do you remember that contribution margin we got from subtracting our variable costs from the price charged per email campaign? To get your break even point, take your fixed costs and divide by the contribution margin.back to menu ↑
Here’s an example:
What do I want to bid on an RFP project that asks for a bid for 15 custom mass mailing campaigns? If I normally charge $ 50 per campaign, I need to know how many custom mass mailing campaigns to break even. Once determined, I can choose to decrease or increase my offer.back to menu ↑
Step 1: Get a break even point
Here’s how I crunch the numbers:
Fixed costs: $ 650Are variable costs $ 0.15 per campaign Contributing margin: $ 50 per campaign – $ 0.15 (variable costs) = $ 49.85
Draw = fixed cost / contribution margin = $ 650 / $ 49.85 13 campaigns or customers.back to menu ↑
Step 2: Determine the profit
Since I only need 13 campaigns or clients to break even, I can offer $ 50 per campaign for the requested 15 custom-designed mass mailing campaigns. The numbers are now:
Fixed costs: $ 650Variable Cost = 15 x $ 0.15 = $ 2.25 (for 15 campaigns) Total cost: $ 650 + $ 2.25 = $ 652.25
Therefore, the profit made would be $ 750 (total revenue) – $ 652.25 (total cost) = $ 97.75 (net profit).back to menu ↑
Step 3: Adjust before bid
Alternatively, I can try to make a more competitive offer to get a new client and increase my chances of getting hired on the project. I can charge $ 43.48 for each of the 15 campaigns and break even for $ 650 for the first project, hoping for long-term repeat business.
Any bid below $ 43.48 will result in losses.back to menu ↑
Bidding on projects on RFPs is a way of life for freelancers. Being able to compete in the long term is important for your survivalUnderstanding your fixed costs, variable costs and breakeven point will therefore give you more options.
It can be easy to get lost 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 bidding. By following these concepts, it’s only a matter of time before you roll through the green.
Editor’s Note: This post was written by Mark Mikhail for Hongkiat.com. Mark Mikhail is a graduate of MBA and MScIB, co-founder of Dark Soil (non-profit) and a marketing and advertising enthusiast. His passion for multimedia, strategic marketing and food are a dangerous combination! You can find him on LinkedIn and Twitter.back to menu ↑
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