I have been buying and selling services for around 20 years, and during most of that period, have only ever seen two pricing models – fixed rate or hourly rate. Each with a couple of tweaks that are normally of benefit to the supplier, not the purchaser.
Fixed price: is normally used when the service is routine and of low risk. The supplier doesn’t have to waste time estimating and can make more profit by being efficient. The customer doesn’t wear any risk, but may pay more than they have to. It’s great for selling haircuts or simple website builds.
Fixed price with variations: is normally used for large-scale services where things appear routine but some decisions aren’t made until after the project has started and results can be viewed. It’s a great way of getting things started for the supplier, and the customer has a reasonable idea of what his costs will be. The supplier is also incentivised to be efficient. It’s great for building projects such as house renovations and for complex IT solutions where external parties, ie. users, will have an unknown impact on the system.
Fixed price as an estimate: is normally used for large-scale services where things appear routine but there is almost certainly devil in the detail. It gives everyone a confidence around the costs and the worst-case scenario, eg. it will be this price plus or minus 15%. Customers are happy, suppliers are happy, as risks have been mitigated. However, whether it’s the best deal on the table is another matter.
Hourly rate: is normally used when the supplier has no insight into how long a job will take, therefore the customer where all the risk. This solution works well for the customer when there is a small service job, eg. repairing a fridge, but not so well when you are conducting legal proceedings against another party and the hours could be vast.
Hourly rate with pre-sold blocks: IT companies seem to love preselling blocks, as it brings in revenue today. Unfortunately though, I have never met a customer that didn’t hate it. Especially when some of those blocks of time expire unused.
Hourly rate with a minimum commitment: I have noticed a trend of some suppliers working through likely long-term engagements and offering customers a discount on the minimum hours they commit to per month, and further discounts on extra hours. When the numbers are estimated right, this seems to be the best longer-term hourly rate solution, as everybody gets a win.
But the key to selecting the right revenue model is understanding your costs, risks and most of all, understanding what the customer wants. Looking at your revenue model from the customers’ point of view is key, and any customer worth having will always offer you a response more than just “cheap hours” if you ask them.
For instance, most customers would love to pay “yield pricing” if given the chance, ie you take a percentage of the upside or a success fee. It means that both parties are aligned to getting the best outcome. It’s rare though, despite the fact that business cases normally show incredible returns for only a small outlay. You see it on occasion amongst consumer law firms that offer a “no win /no fee” option. I also noticed that Domenic Carosa effectively favours it with his “you have a great business, let’s do a JV to bring you onto the internet” style of deal.
Why am I talking about this? Because at the small business end of town, nobody else seems to be talking about revenue models. We are all “revenue model takers” not innovators and we need to get smarter to compete on a world stage. The business Olympics are going on and nobody seems to have noticed.
Brendan Lewis is a serial technology entrepreneur having founded: Ideas Lighting, Carradale Media, Edion, Verve IT, The Churchill Club and Flinders Pacific. He has set up businesses for others in Romania, Indonesia, Hong Kong and Vietnam and is the sole Australian representative of the City of London for Foreign Direct Investment. Qualified in IT and Accounting, he has also spent time running an Advertising agency and as a Cavalry Officer with the Australian Army Reserve.
Smart Company is the leading online publication in Australia for free news, information and resources catering to Australia’s entrepreneurs, small and medium business owners and business managers.
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