I suspect that number 2 is less profitable: the quality of work drops, your reputation drops, and the effective market rate you can charge drops. But I think y

I suspect that number 2 is less profitable: the quality of work drops, your reputation drops, and the effective market rate you can charge drops. But I think you can get trapped in a number 2 situation regardless -- eg, there's an economic downturn, so people spend less, the business "cost optimizes", which causes people to spend less, etc. I think the second case is a sort of "survival" mode witnessed in fundamentally unhealthy economies where businesses are being squeezed because people in general are being squeezed.