How to Model Your Solo Service Business

Introduction

OK, so you're looking to launch your own solopreneur business!

This article walks you through my methodology for MODELING a solo professional service or consulting business.

It applies to any solo business where your time is directly correlated to revenue (which is the vast majority).

This isn't about scalable passive income unicorns - this is about building real businesses, with real clients, and generating real revenue.

Four Building Blocks Methodology

The method we use to model the solo service business is done using the Four Building Blocks methodology:

1. Net Revenue Target

2. Time Targets

3. Fixed Expenses

4. Client Value and Acquisition

We're going to work through each of these building blocks one by one.

1 - Net Revenue Target based on an equivalent salary

I like to explain this as “salary equivalence” because if you’re working a 9-5, it can be VERY easy to underestimate how much revenue you’re going to need to match that cushy corporate paycheck. Health insurance, self-employment taxes, 401k matches, bonuses, etc.

Treating it as a “salary equivalent” makes it easier to do apples-to-apples comparisons for someone used to a paycheck (which is where I think someone going this route probably comes from).

Health insurance costs and self-employment taxes are big hitters. Healthcare can be a HUGE hitter ($18k for a family of 4), but it's complicated with subsidies and such.

• Start with a Salary target

• Adjust for health insurance

• Adjust for FICA / self-employment taxes

• Adjust for bonuses or other benefits

BLOCK #1 OUTPUT: Now we have a "net revenue" target for our business that we can compare to a typical corporate salary.

2 - Time Targets

Don’t want to accidentally build a job you hate? Don’t want to grind 70-hour weeks and make less than your old job? Then you better model how your time will be spent.

2.1 Yearly Time Budgets

Design your business around a regular work schedule. If you grind 60-hour weeks it should be by choice because you’re making bank not because you’re desperate to squeak by.

A person year is 52 x 40 = 2,080 hours

Don’t forget holidays. Don’t forget vacation. Bake those hours into your model. 10 holidays + 4 weeks’ vacation is 240 hours. That would mean you have 1,840 regular business hours available to hit your baseline objectives.

2.2 Time Allocation

Keeping it simple - divide your time up into three buckets 

1. Revenue generating

2. Business development

3. Overhead/browsing Reddit 

Revenue Generating Time 

This is the time you spend doing work for clients that they will pay you for. Whether it’s hourly billing, project-based, value-based, or whatever. Think of this as a “break-even” number of hours for your model. Nothing says you can’t spend more time generating revenue and making more cash, but your baseline model shouldn’t require that.

Business Development Time

Having clients requires landing clients. That might be phone consultations, generating proposals, follow-ups, etc. This bucket is for the time you spend converting leads into paying clients.

Overhead Time

Catch all for everything else. Sending out invoices. Tweaking your advertising. Trying shit. Writing a blog post. Typing up a huge guide and posting it on Reddit. You need a big buffer to deal with day-to-day tasks and whatever else comes up. Plus maybe you want some time baked in for other projects (remember 20% time at Google?).

The default breakdown I have in the spreadsheet is as follows but you should adapt this to what makes sense for your business:

• Revenue Generating: 60%

• Business Development: 20%

• Overhead: 20%

BLOCK #2 OUTPUT: Yearly hourly budget figures for each of our three "buckets". We'll use those time allocations to determine our break-even hourly rate and budget time for activities like phone calls and proposal generation.

3 Fixed Expenses

This is the easy one. Account for your fixed expenses in your model. These are super low for a solo professional service business when you’re leveraging a home office, home internet, home utilities, etc. HOWEVER - you should build these costs into your model as if you had to pay for them.

Why? Unless your goal is to compete on price (which is dumb - never do that) - then why are you (the individual) subsidizing your business and letting it permanently couch-surf and leech off you and your family? Make it pay rent and utilities. It’s a business, not a teenager.

BLOCK #3 OUTPUT: Yearly/monthly budget allocation for fixed expenses to feed into our model. 

4 - Client Value and Acquisition

Three important variables for your model come from this section. 

1. Client Acquisition Cost

2. Average Client Value

3. Lead-to-Client Conversion Rate 

4.1 Average Client Value (ACV) 

A key mistake you can make here is not building a business model around an Average Client Value. For a service business starting, we’re not interested in “lifetime” customer value (we have no data on that anyway). The best we can do is estimate how much (on average) a new client is worth over the next 12 months.

And this is why we want a spreadsheet. There’s no right answer, but your business model is dramatically different if you have an ACV of $250 vs $5,000 vs $25,000. We’ll discuss strategy in the next post, but I want you to recognize that as a solo service provider, the strategic design of your business frames what your ACV will be.

Keep in mind - you need 10x as many clients at $500 as $5,000, which means 10x as many leads, which may mean 10x the phone calls, 10x the proposals, etc.

4.2 Client Acquisition Cost (CAC)

This is the hardest concept to try and explain in a paragraph.

Marketer types tend to call this CPA (cost per acquisition). I call it something different because I treat it a little differently. I want us to always view CAC as a percentage of our top-line revenue. In other words, if you generate $150k - and CAC is 10%, then it costs you $15k to generate that revenue.

What you’re doing here is baking a marketing/ad spend budget into your model. I think 10% is a reasonable target for a solo service business generally, but there can be huge variations here. High-ticket premium services can afford much higher percentages. (Established solo businesses that are saturated with a recurring customer base can drive this to basically zero when the business is mature).

4.3 Lead-to-client conversion rate

At what point is your lead volume too high to support free phone consultations? Or when does a 1-hour consult need to become a 15-minute consult?

You’re going to dedicate time to all of your qualified leads. Some percentage will become clients, but all will require some of your time. Estimating your close rate helps us understand those time commitments. Remember, it’s not about nailing our model with 100% accuracy today - it’s about understanding the relationships and establishing realistic targets.

BLOCK #4 OUTPUT: Key variables that describe the value and cost associated with our clients. Generally, this is the block you tweak to test different models because your revenue and time commitment goals are probably not going to change.

Putting it All Together into a Model

I'm not going to write out equations here (you can interrogate the spreadsheet if you want). There are lots of different ways you can look at this, but my preference is to break down the outputs across timeframes (weekly and monthly mainly). This starts to give you a clear idea of what the business looks like in practice.

Revenue may be too noisy to track weekly, but things like "How many leads I get" might not be. So different time frames for different KPIs help your brain frame what you're trying to accomplish.

Ok so in summary - here are the inputs we need to build out the model:

1. Net Revenue Target

2. Time Targets

   1. Revenue Generating Hours

   2. Business Development Hours

   3. Overhead Hours

3. Fixed Expenses

4. Client Variables

   1. Average Client Value

   2. Client Acquisition Cost (as a percentage of revenue)

   3. Qualified Lead-to-client conversion rate

Plugging and Chugging with those inputs we can discover:

• Your Top Line Revenue Target

• How many clients you need

• How many qualified leads you need

• How much you’re going to spend to acquire those leads

• How much time you dedicate to each client/project (consistent with ACV)

• How much time you can dedicate to each lead (consult, proposal, etc)

• What your “break-even” hourly rate is

• And daily/weekly/monthly/yearly breakdowns of these targets, allowing you to develop KPIs to track and monitor your progress.

Now you can compare and test different approaches and stress test what happens when things don’t break as planned. 

Do you think an $8k ACV with a 25% acquisition cost is your homerun position? Or do you see a clear path to landing $1k clients over and over for a 5% acquisition cost? Simply doing the math on any of these concepts goes a LONG way to understanding them, assessing feasibility, giving your criteria to test, and trading them against each other.

Critically, it will let you DESIGN your service offerings around the ACV that best suits the kind of business you want to build. 

Conclusion

That’s it! Now you’ve got a framework to model how time and cash flow in a solo service business. Put this into practice and know that you’re building a durable, sustainable business that meets both your financial and lifestyle goals!

Thanks for reading and please share!