The Business of Interpreting: FAQ 10 – How can I check my profit margin?
By tracking just two key metrics you can determine which of your conference interpreting clients are most profitable over time.
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I just walked 3000 steps more today than yesterday! Recently I was given a pedometer, and now I can see how close I am to the ideal 10,000 steps per day. And more to the point, I can keep track of my performance.
As interpreters, there are metrics we should be tracking in our business as well: How many days did I work last year and the year before? How much did I earn during each of those periods? We may become even more detailed, noting the types of clients – international organizations, individual businesses and sectors, government ministries, courts, etc.
Two key metrics to evaluate profitability
As business people, there are two essential metrics that we should track, ones we hear about whenever we watch Shark Tank and Dragon’s Den: CAC and LTV.
CAC, or customer acquisition cost, is a business person’s way to understand if their clients actually make them money. In our case, CAC is the cost of convincing a client that they want to buy our service.
To put it simply, CAC may be calculated by dividing all the costs spent on acquiring clients by the number of clients acquired over the same period. For example, if we spent 1000 CX (currency X) on marketing in a year and acquired 10 clients, the CAC for each client is 100 CX.
In our case, we could measure CAC expressed in money or in time, since we charge by the day and we know what our day costs. If our daily fee is 800 CX (100 CX per hour for an 8-hour day, including all lunch and coffee breaks, to make the math easy), we just spent the equivalent of 10 hours marketing, and were able to acquire 10 clients, each with a CAC of 1 hour.
If we then consider how much we project to earn from a client over time, the LTV or customer lifetime value, we can determine if that individual client is profitable, and then compare that client to others to see which are the most profitable. In other words, we can see who is helping us to cover our expenses and earn us a profit, and who is literally costing us money to work for.
How it works
So let’s say it took us the equivalent of 4 hours to market to Client A before s/he agreed to sign a contract for 3 days (or 24 hours) of work. That client is profitable to the tune of 20 hours.
On the other hand, if it took us 10 hours to convince Client B, who ended up hiring us for only one day, Client B cost us 2 hours. If we do not expect to work for them again, and they are not amenable to giving us a referral or a testimonial, then Client B was not worth the time we invested.
Know your cost of living
Before doing this exercise, make sure you understand your expenses on a monthly (recurring costs such as rent or mortgage, food, health insurance, transportation, child care, office supplies, etc.) and annual basis (monthly expenses plus all one-off payments such as a car, a holiday, a computer, an emergency fund, etc.). Divide this grand total by the number of days you can realistically expect to work in a year to get the bare minimum rate you must earn per day worked to be able to break even. (Download Julia Böhm’s excellent article for information on what to include by clicking here.)
For example, if you must earn 2000 CX per month, then in the case above you would have covered only 1800 CX of your monthly expenses (Client A brought in 2000 CX, and Client B cost you 200 CX). So you would need one more day of work for someone who is easier to sell to than Client B.
If we expect to work for a client again, and don’t have to expend more effort or money to convince them to hire us, the LTV just keeps going up. So if we could plan on Client A hiring us even one more day, we would have just earned another 800 CX at zero cost. Whereas, unless they radically change their behavior or give us lots of referrals or an amazing testimonial, we should just stop trying to sell to Client B. After all, why keep a client who continuously makes changes, thus using up far more time than we have budgeted for? Let them go!
Of course, we may decide to work for clients who don’t make us much, if any, money – but only if we know our expenses, that they are covered, and we have another reason to work for them. Reasons abound: we like the cause, we want to gain a toehold in a new market, we want the prestige… but we must know what those clients cost us.
Evaluating your clientele
So how do you do this? List all your current clients, and try to remember how much money or time you spent in convincing each of them to buy your services for the first time. Expenses would include the cost of one business card, time writing emails, a portion of your website, any dedicated expenses such as transportation to a meeting, etc. It may have been very little, if it was a referral from another client; it may have been a lot, if it was someone whom you had to introduce to interpreting.
Do this for all your current clients and rank them by CAC. Do you notice any trends? Are clients from a particular industry less expensive to acquire than others? Make sure to do this exercise for any new client you acquire.
For the same clients, consider how many days you have already worked, and how many more days you might realistically work for each, as well as how much more money, time and effort you will have to expend to convince each of them to hire you again.
Then calculate how much these clients could earn you and see if there are any common features among them. If there are, this should be your niche, your specialization. In fact, this approach could be another way to come at the ideal client question I posed in FAQ 3: If you already know that your most profitable sectors (lowest CAC and highest LTV) are electric power generation, or environmental protection, then you have found your ideal client niche.
If this niche isn’t your favorite, consider if you can make it a favorite and specialize. You have already made inroads into the sector, which will save you a lot of preparation and research time for future jobs, meaning that your effective daily earnings have just increased without having to increase your nominal fees.
If you can’t, then try and understand why you are able to market yourself so successfully to one niche, and not so successfully to another. Once you have that figured out, your business should grow in your ideal niche, and you will know for certain that all your clients are profitable.
Time to start keeping track of your metrics!
To read previous articles in this series click here.
Articles published in this section reflect the views of the author(s) and should not be taken to represent the official position of AIIC.