Recently I had a look at Billing Time and Materials for your services. This time around I thought I would have a look at packaging your offering and selling it at a Fixed Price.
Packaging up your offering is not for the faint hearted though, you need to think carefully about which of your services are “standard enough” to be packaged up as well as where you can derive benefits from the packaging. Will the automating, creating standard process and delegating that naturally occur under packaged services increase your profitability? Can you develop standard marketing collateral and will this save you time and make the sales process easier? Finally and most importantly though, how will your customers feel about a fixed price billing?
As mentioned before to, it doesn’t have to be all one way. You can have a fixed price base service, that your clients can then extend with either further packaged up services, or time & materials billing.
Consider the average web developer:
Hosting & Domain Name : Fixed Price
Core Functionality : Fixed Price
Extended Functionality : Time & Material
Design : Time & Materials
Maintenance : Time & Materials
I note that Accountants & Lawyers have traditionally used fixed price billing for small standardised offerings such as registering a new Pty Ltd company. Almost every service provider has a fixed fee for this. However there is a trend for fixed price billing to be offered for large expensive services to the big end of town as well. Try searching Google for “fixed price audit“.
- It offers you the ability to increase profit margins and grow your business beyond the 112 hours a week you are awake for.
- You don’t have to spend your time on things such as explaining bills.
- Its much harder to “shop you around” as your product can be easily differentiated. You are no longer offering an hourly rate, but an outcome of your own definition.
- The processes, automation and delegation that blooms under a fixed price model means that you get to make money whilst you sleep and you can even take a holiday and still get paid.
- Customers are easier to sell to, and happier under fixed price billing as it means:
- you wear the risk on the job,
- they have certainty around their budget,
- outcomes tend to be more clearly articulated,
- they don’t need to spend as much time, effort or stress monitoring your effort,
- they don’t particular get upset when you outsource effort to cheaper resources, and
- they see you as motivated to finishing the job with speed and quality.
- Investors are more likely to be interested in fixed price billing as it means your business model can be scaled, without relying on hideously expensive, unreliable, fickle resources (i.e. you).
- Fixed price billing requires a lot of thinking through around which services can and should be packaged up? Picking services that are too individualised can mean a loss on the job.
- If you want to improve profitability by automating, building process and collateral or delegating – you need to understand what your ROI will be.
- It increases your risk on the job, as you get will get paid a set amount, no matter how long it takes you.
- It makes it more difficult to be dynamic, which may be exactly why the client wants to engage you – their concepts could evolve or they maybe want to stay ahead of the market place by outsourcing innovation to you.
- You will need to spend energy trapping and managing potential clients variations (and expectations) for billing purposes.
It Suitable for
- If your offering is reasonably fixed or has a lot of “same” components for every customer, Fixed Price billing is a way to create scalability and increased profitability in your business.
- Its suits areas where routine processes are the major component of the job.
- It suits projects where there is low danger of the job dragging out because of unknown factors such as technical risk.
- It suits projects where there is likely to be only a small amount of scope creep.
- It suits more mature organisations who understand the value proposition of their customer offerings and their niche in the market.
- It suits young organisations that feel that they have earned the right to grow.
- You don’t need to introduce fixed price billing in one go, in fact I would highly encourage you to dip your toe in the water with one type of standard service
- Experiment with the pricing and components of the offering. However never ever change prices without changing the offering (as value must change when prices change).
- Make sure you control any milestones that your billing is connected to. I have agreed to charge customers the first invoice on the first milestone which was them selecting an option for options we researched. Consequently they never picked and option and we never got paid.
- As part of negotiations, include as much of the “pre-sale” discussions or early design work into the fixed price service so that you can have them paid for.
- Trade more invoices for lower value invoices as customers generally prefer this. The car leasing industry knows that every Australian will package metallic paint in for an extra couple of payments but would never consider an increase in the payments.
- Segment your invoices into fixed price lines where possible. Fixed price means that standard line items such as “Travel Fee” will be paid without blinking.
- If multiple invoices -Match your invoice to your risks. Never have a client “owe” you for WIP as these are always the people that will fight a bill.
- Put effort into building marketing collateral for the fixed price service. Every client at some stage will let you know the value to them and this should be included.
- Think outside the box about automating, creating processes or delegation to dramatically reduce your costs. I recommend you read up on Lean Manufacturing to understand about reducing waste.
- Don’t be lured into offering a fixed price on a service when you haven’t thought it through. Just because a customer wants it and you offer fixed pricing on some of your other offerings doesn’t mean you always should.
To sum things up, Time & Materials Billing allows you to innovate and explore, Fixed Price Billing allows you to grow. But you need to be sure you are ready for Fixed Price Billing, not just react to a customer demand.