Freelancers are notoriously bad at business, I must say, and mostly oblivious about freelancers’ customer acquisition cost. And I say this because of coaching many for the past 5 years, running this blog for 3 years, and doing webinar classes for a month now has given me a lot of insight into what freelancers know and do not (yet!) know.
In a freelancer’s mind, business is the same as income. You work, and then your clients pay you. Therefore, you’re in business (unless you ended up working for scammers accidentally in which case you never see the money and all you get is a valuable freelancer life lesson).
CAC… What???
What is Customer Acquisition Cost (CAC)? Most freelancers have never heard of it. They tell me their businesses do not have any expenses anyway, so… 😀
In the freelancing context, CAC is the sum of all costs that occur before you have a contract with your client. Depending on how you find your clients it can cover:
- Marketing and advertising expenses of all types
- Publishing and production expenses (for instance the hosting fees of your blog)
- Sales effort, e.g. time spent on interviews, discussions, and scoping the project
Now, the last one is the most interesting one: sales effort! If you think of this in terms of unit economics, it is the time you spend on getting a contract. All discussions, scoping, etc. are done before making sales takes place.
This is pretty much how freelancers I teach see their own customer acquisition processes once we calculate their CACs.
But for freelancers, unit economics make no sense because you may have to spend (a lot of) time talking to multiple people, other potential clients, before you get one client to sign a contract. That is probably the biggest cost, knowing that many spend very large portions of their time on hunting clients. 57% of the participants of my poll admitted that!
Freelancers’ customer acquisition cost on Upwork
Now, many freelancers getting their clients online have even more costs. Part of the Upwork freelancer’s customer acquisition cost is visible as it requires you to spend money, and another part is more hidden in nature.
On Upwork, you have four kinds of costs that require payments:
- Cost of the Connects to send proposals
- The platform fee (that gradual 20%, 10%, 5% commission)
- Upwork Plus membership plan/proposal boost/availability badge (optionally)
The platform fee is a part of the CAC because the platform doesn’t do anything else for you, it just connects you with the client. Most of the other things you must do on Upwork are more or less just limitations that may lead to ToS violations, etc., so you must have control over all these costs related to doing business on Upwork.
Additionally, the biggest CACs are:
- Your time spent on sending proposals
- Your time spent discussing and scoping the project
Now, for those of us who can rely purely on invitations, the only costs are the platform fee and the time spent with the client before accepting the offer. Two CAC types only. For the rest, as is the case for everyone starting up on Upwork, there are 5 CAC types.
CAC example calculation
So, let’s calculate CAC for a good and long-term software project you would get on Upwork. The project budget is $60,000 (and its cost to the client with the 5% client-side fee is $63,000), and it takes more than half a year of full-time work to be finished. It’s a great project for a great client.
The platform fee is calculated as:
- For the first $500, 20%: $100
- For the next $9,500 (total 10K now), 10%: $950
- For the remaining $50,000 (total $60K), 5%: $2,500
The platform fee CAC is $3,550. That’s 5.9% of the project’s budget. You get $56,450, which is still a nice amount, of course.
But now, think of what other sales channels you have and what CAC would you have there. In this case, getting that customer cost you $3,550… which is not a small amount!
And that’s not all, of course, this is just the most obvious CAC. Let’s assume the hourly rate is $50 and there is no Upwork Plus subscription. The other CACs are:
- Purchase of the Connects: $20
- 10 hours spent on sending loads of proposals: $500
- 3 hours spent on the interview and preparing the project: $150
That’s a total of $670. Please note that the time spent on getting the project is not the time you can bill to any client. Therefore, you must consider that time as a cost. Here, the time spent was 13 hours which cost $650 with an hourly rate of $50.
The total CAC that includes the platform fees, the price of Connects, and the time spent on getting the project is therefore $4,220!
Let’s just say that you could spend that $4K in a different way too.
What else could be CAC?
Let’s compare the above theoretical example to a personal example of that exact size (around $60K part-time project done over one year) done outside freelance platforms. I got a very good project by engaging in various online events and networking activities of a paid membership community.
I paid $500 in the form of an annual membership fee. That’s the obvious part of the CAC. It looks like a lot but it is peanuts if that $500 can bring you the best kinds of clients that in turn bring you plenty of coconuts (i.e. the classic peanuts to coconuts investment).
Now the other part of the CAC.
I spent about 4 hours of my time participating in the community meetings and about half an hour in a networking session to make connections with the right people. There was a community-internal job post to which I responded which led to a video interview with the decision-makers of the company. That took perhaps another half an hour. Total: 5 hours spent on getting that $60K project.
Even if I count that 5 hours as lost billable time at my rate of $299/h (the rate I had at the time), I would land at $299 X 5 + $500 = $1,995.
Now that’s less than half of the CAC Upwork would have produced! Therefore, joining that community was better business – higher efficiency, lower CAC, more profit. Better!
