Why Freelancers and Consultants Must Pursue an Intelligent Loss of Sales

Chris Davis tells a story about a conversation with Charlie Munger in which Munger shared a principle that more creative entrepreneurs should build into their businesses: the “intelligent loss of sales.”

This principle is especially important for freelancers and consultants who want to earn more than $100,000, consistently.

Allow me to set the scene. Imagine a two-top table in a Santa Barbara cafe. A breeze flutters the napkins on the table, but the two men don’t notice. In the chair on the right sits Charlie Munger of Berkshire Hathaway fame. He’s a modern Renaissance man, one of the best thinkers of his generation, and one of the most successful investors in history. In the chair on the left sits Chris Davis. He’s Chairman of Davis Selected Advisers, and he sits on the boards of Berkshire Hathaway and Coca-Cola.

Munger and Davis gesticulate with their hands, lean forward and backward at intervals. Judging by the occasional smiles and twinkling eyes, this is more friendly debate than dog fight.

Of all things they’re discussing Costco, a chain of membership-only warehouse stores. Even if you don’t live in the U.S., you’ve surely seen a giant container ship of a store that sells large quantities of toilet tissue at discounted prices. That’s Costco, and members can still get a quarter-pound hot dog and Coke for $1.50.

Davis tells Munger that more customers would shop at Costco if membership weren’t required: “It would seem to me that keeping customers out of your store that would otherwise be there is a mistake.”

The math and logic seem to support his argument:

• Membership fees account for 2% of revenue.
• If Costco were to raise prices by 2%, they could eliminate the fees without sacrificing revenue, and prices would still be lower than other retailers.
• With the membership barrier gone, Costco would attract more customers.
• More customers would mean higher revenue.

Munger sees the membership fee serves as a strategic impediment. His response sparkles with a counterintuitive insight: “Think about who you’re keeping out.” The main benefit isn’t revenue from membership fees but the application process which filters out people who won’t make good customers:

• Those who refuse to get their picture taken
• Those who aren’t motivated enough to apply for membership
• Those who won’t give you their driver’s license (or don’t have an ID)
• Those who are so focused on short-term costs (membership) that they don’t calculate long-term ROI (cost savings)

According to Munger, the segment of customers who won’t go through the process and pay the fee are also the most likely to spend the least and shoplift the most.

Whether or not you agree with Munger’s reasoning, the story offers two ideas that can help creative entrepreneurs:

1. The first I’ll call “predictors of unwanted behavior.”
2. The second is the strategy or set of tactics that can optimize for wanted behavior.

By predicting the first and optimizing for the second, we can orchestrate what Munger calls “the intelligent loss of sales.”

Once you’ve been in business for yourself for any length of time, you determine that the client isn’t always right. Some clients are dead wrong in everything from their design sensibility to their beliefs about the earth’s shape.

Earning some revenue is “painful” in the sense that it requires a great deal of longsuffering and emotional tenacity. For example, an old client of mine comes to mind: He would delete emails, ignore voicemails, and fail to give feedback and make decisions. Later, he’d demand to know why I hadn’t made more progress. What fun.

Other clients, and the revenue they represent, are more pleasant. Making that money feels less like labor, more like play. Specific coaching clients come to mind. They’d take my recommendations, get the desired results, and thank me afterwards. What fun!

When you’re just getting to know a new client, how can you differentiate between painful and pleasant? How do you anticipate dead-end, toxic, or trying relationships so that you can avoid ending up in them?

The trick is to notice patterns as they begin to emerge again, rather like identifying birds by their calls or recognizing that clouds of a certain shape and color usually bring rain.

Before we can lose such sales on purpose, we must catalog the predictors. I’ve collected them for years now. Here’s a non-exhaustive list:

• The client badmouths the last person in the role they’re hiring me for. There are two sides to every story, and the more scathing the critique, the more reluctant I am to be that client’s next "idiot."
• They can't / won't invest in strategy before going full-bore with implementation.
• They can't / won't pump the brakes temporarily and pay to create a more detailed project brief or plan though it's clear to me that their goals, problems, and needs aren't well-defined. (That said, they’ll be happy to burn hours of my time on free discovery.)
• They ask you to be the hero and swoop in to save them at the last minute. Most time crunches indicate broken processes, poor management, office politics, and other operational pitfalls that can make an unsuspecting freelancer really miserable really fast.
• They can't prioritize. Everything is important and urgent! All the exclamation points prove it!!! Sure, you can help them force-rank problems and opportunities, but if you’re anything like me, you’ll eventually tire of hearing yourself say that everything can’t be top priority and managing expectations about reasonable timelines.

Let me make one thing clear: You can predict that certain prospects will be bad fit without labeling them as bad people.

One woman’s trash is another’s freelance treasure. Some businesses thrive precisely because they serve customers no one else wants. So what we’re talking about with clients and their unwanted or “bad” behavior is noticing in advance, as much as you’re able, who will be a bad fit for you.

If you want to have your freelance cake (i.e., more freedom) and eat it too (i.e., more money), you must notice which relationships weren’t fulfilling, think back to any red flags or warning signs you ignored, and then put certain rules into place to prevent you from ending up in the same position again—your version of the Costco membership fee.

For example, I once met an entrepreneur at a coffee shop in downtown Knoxville. After forty-five minutes, I knew a lot about him, but he still knew next to nothing about me. Thankfully, he used a couple of lines that, for me, portend a bad-fit relationship:

• “You’re still very young… .”
• “I can tell you’re really smart… .”

I could write volumes on why equating age with expertise is problematic, but for the sake of brevity, I’ll say that if a stranger did all the talking and then made snap judgments based on [insert physical characteristic here], then you should recognize unqualified compliments (”you’re really smart”) for what they are: a ploy for you to lower your guard so that the other party can get something.

Let’s just say I didn’t bother to follow up with the smooth talker, and that failure on my part was the intelligent loss of sales.

One last anecdote before I wrap up with questions: One local business leader seemed like a nice enough guy, but he was a poor communicator. He also disappeared after I sent him a proposal. He did pop up again later multiple times to pump me with questions about other projects. When he finally got in touch about a last-minute design project I could easily have delivered, I declined.

My reason? “I’ve learned that projects with tight turnarounds aren’t the best way to start a new client relationship.”

This “say no to tight turnarounds with new clients” is a safeguard that has preemptively rescued me from so many fiascos over the years.

To his credit, he understood what I meant and didn’t try to persuade or pressure me.

Now, it’s application time. If you want to consistently make six figures as a freelancer or consultant, you must avoid working with bad-fit clients who will monopolize your time and attention, drain your patience and optimism, and turn your work into drudgery. You must pursue an intelligent loss of sales.

To start exercising this principle, answer these three questions for yourself:

• What predictors have preceded unwanted behavior in my past client relationships?
• What is my strategy for avoiding similar situations in the future—that is, my Costco membership fee?
• What specific safeguards can I put into place to make this easier?

When you’re ready, here are ways I can help you:

1. Free Money. A pricing and money mindset guide for freelance creatives. If you’re unsure about your freelance pricing, this is the book for you.
2. Morning Marketing Habit. This course will help you build an “always be marketing” practice, become less dependent on referrals, and proactively build the business you want with the clients you want. My own morning marketing habit has enabled me to consistently make  6 figures as a freelancer.
3. Custom Business Roadmap. Gain clarity, confidence, and momentum in your freelance or consulting business.
4. Business Redesign. Raise your effective hourly rate, delegate with confidence, and free up 40 hours a month.
5. Clarity Session. It’s hard to read the label when you’re inside the bottle. I've done well over 100 of these 1:1 sessions with founders, solopreneurs, and freelancers who wanted guidance, a second opinion, or help creating a plan.