Professional services today face several challenges, from increasing competition to rising costs to talent shortages and more, that directly affect their ability to generate revenue and maintain steady profits year after year. Therefore, it is important that services firms choose the right pricing model as a part of their financial strategy. Every pricing model has its own characteristics and way of affecting your operating margin. Knowing what each of these models can offer your services firm will be key to creating a sustainable and competitive financial strategy for long-term growth and profitability.
With that aim, here are some of the most widely used pricing models in the professional services industry and how each one impacts your margins.
Time & Materials Model
Of all the pricing models, this is considered the most common and simplest. In this model, the service or product is sold at a single agreed price which is charged to the client on a recurring basis. It is usually priced per person, task type etc as needed. The principle behind the time and materials model is quite easy. The services firm agrees a price with the client and that amount is charged recurrently as per the determined billing cycle.
Due to its inherent simplicity, many professional services, especially in the IT consultancy sector, use this model. After all, in this model, it is assumed that the project cost is based on the time spent along with the predetermined hourly rate. This makes the time and materials model a less risky option compared to a fixed price commitment. Moreover, the supplier becomes more adaptive to any change in requirements without the need to draw up plans and strategies in advance for payment. Overall, the time and materials model helps companies keep their revenue predictable. At the same time, the subscribing client will also face less uncertainty about their financial obligations.
Fixed Price Recurring Model
Fixed-price recurring billing is another popular pricing model used in various services industries. Under this model, the firm will sell each service or product at a predetermined fixed price at the beginning of each billing cycle.
With this model, there are benefits to both the company and its customers. The fixed price allows companies to quickly calculate expected revenue per month and formulate investment strategies. Clients also prefer this model as they only need to pay a lower amount per billing cycle to access the offering, instead of paying a bigger fee for outright access.
However, companies need to be aware that fixed prices make them more susceptible to pricing wars with the competition. There is also the issue of complex resource allocation for services firms. As different clients will be at different phases of the subscription cycle, services firms will need to invest in considerable resource planning to ensure resource availability for all subscribers in the longer run. Having a robust project management platform for tracking and streamlining resource allocation like Replicon can be enormously beneficial for service providers looking to choose this pricing model.
Retainer Pricing Model
The retainer pricing model is another enormously popular model. It is also the closest you can have to a regular paycheck in the services industry. In this model, the client buys a certain amount of hours or work from the service provider. The fee is pre-set and pre-billed against a set period of time or a fixed volume of work. For example, a client of an IT consultancy may buy a hundred hours of development work for a fixed price every month.
There are typically two kinds of retainer pricing models. They are the rolling type and the limited type. A rolling retainer allows the client to carry over any unused hours to the next billing cycle. In the limited type, any unused hours will be lost and the balance resets in the next cycle. As you may have guessed, the limited type is often the better choice for consultancy services firms.
The retainer pricing model allows you to gain a fixed amount of money every billing cycle regardless of how long the work actually takes. However, it is vital that you track all hours against work done to ensure that you aren’t inadvertently spending too much time. Replicon makes this easy by tracking all hours easily. It also ensures the accuracy of the time data through advanced validation rules and approval workflows.
Tiered Quantity-based Pricing Model
Under this pricing model, you will be charging a predetermined amount for a certain volume with extra charges for any add-ons. This model is ideal for services firms where volume is their key differentiating factor such as web development firms and SaaS companies. In this model, the services firm will offer two or more tiers with differing volumes of services or products. Ideally, three tiers are preferred as it provides a better frame of reference, leading to increased purchase conversion.
The biggest advantage of this pricing model is that it is quite transparent. Clients already know what they can expect from the services firm based on their choice of tier. Additionally, the service firms also benefit from predictable costs, allowing them to scale their business efficiently.
Value-based Pricing Model
Value-based pricing is often an excellent choice as it allows your firm to go beyond being a vendor and become a true partner for your customers. This gives you more opportunities for increased profit. Value-based pricing involves pricing your product or service based on the value delivered to the customer.
For success with this model, you need to ensure that your service or product offering has a meaningful difference from the competition and also that your clients are able to perceive and value that difference.
Successfully implemented, value-based pricing offers some significant benefits.
- Under this model, the firm and the client are focused on the same goal which is the business impact of the offering. Since the interests are aligned, improved outcomes and communications are promoted.
- This model allows you to better understand the value of your insight and expertise. You become free to leverage resources and their expertise as needed without worrying about meeting specified hours and billing rate thresholds.
- There is predictability around pricing, which clients like. They don’t need to worry about unexpected charges as all details are agreed upon beforehand.
- A value-based approach incentivizes the adoption of better technology and more optimized processes, especially those that add more value to the deliverables.
Support Your Pricing Model with Replicon
No matter what kind of pricing model you choose, you will need a robust solution that supports the time tracking and billing processes. This is where Replicon shines. Replicon’s state-of-the-art time tracking platform not only delivers precise time data against projects but also captures costs to ensure accurate billing. Replicon can support your services pricing model in the following ways and more:
- Accurate Time Tracking: Replicon allows you to configure your timesheets to capture the exact data that your business requires while tracking live project time for client billing.
- Capture Billable Hours: You can easily track billable as well as non-billable hours against projects. You can even assign it to single or multiple clients for accurate project billing.
- Zero Billing Errors: Eliminate any billing errors with advanced validation rules and configurable approval workflows that keep all time and cost data accurate.
- Model Complex Pricing Models: Easily model complex pricing models into the system to match the needs of your contracts, including the ability to set up custom billing cycles, fixed bid projects, and time and materials projects etc.
- Track Budgets vs. Actuals: You can establish time and cost budgets for every project or even task to get estimates at a glance.
The world of professional services is constantly changing. Firms need to keep up with the changing times and come up with novel solutions to delivering value to their clients. Discovering the right Saas pricing model can help firms deliver better value to their clients while meeting profitability requirements.