This is an interesting topic and one I have spent a lot of time thinking about the last two years. In 2012, at MOD Ventures we changed our pricing structure from hourly billing to fixed price agreements and it’s been challenging to say the least. It’s a positive change but with all change there is a price. I mean that. It costs you to make changes and so I thought I would fill you in on the challenges and some of the good information that we have learned along the way.
Our customers now have a stated price or value of what the service is actually worth not only to me but to them as well. We agree prior to the work ever being done that it should cost them X and unless something catastrophic happens it’s always going to be X. With that being said the challenge is scope. If we agree that the price should be for accounting and sales taxes and something comes up outside of those services there is an additional cost. For example, if you purchase internet service but find out you need a higher power service there is usually an additional cost. It’s just like that. It’s not complex.
The complexity comes when another service is desired and we don’t bring up the cost or just do it for free for fear of backlash or an unhappy customer. This scenario causes two things to happen in a service based business. The service no longer has a value. Therefore, with no value associated with it you no longer have the opportunity to bill for it. Without the ability to offer more services at an additional price you are stuck with a stagnant company doing the same thing only charging incremental price increases year after year. No change in service, just an increased price.
Results in a value-priced environment become much more defined. You can no longer just spend hours in inefficient and ineffective ways and get paid for it. Billing for it is no longer an option and so firms that take this pricing strategy must be willing to innovate and try new things. In smaller companies as well as large this has to be measured. The bigger the company the more important it is to define what effective and efficient looks like. So the challenge is guarding against apathy and bad project management.
Project management starts with scope, which defines the end result then planning the engagement. In my younger years I did a lot of audit work. We were required to plan the engagement, set budgets and adhere to that plan. Only if the scope changed did the plan change and even then we still had to adhere to a time budget. In a timeless environment, no timesheets are being kept on an employee; personal responsibility for their engagement is their ultimate responsibility. Nothing changes. You are still responsible for that end result.
Time management in a value-priced firm is still important. Leadership in these firms must identify and work through people’s personal preferences and issues that stop them from being efficient and effective. The more people you have the more opportunity for inefficient and ineffective behavior. It is possible that in a firm that is growing in people produces less work. A series of unfortunate events and one dysfunctional inefficient behavior after another breed more.
Measurement of effectiveness and efficiencies has always been an issue. We used timesheets in the past but really analyzing behavior patterns and calling people out to change is important to the process. The change must start at the top and time management skills must be taught to everyone so that the firm is a success.
After teaching time management skills and getting everyone on-board with this change look at profitability by examining your own financial statements. What is your labor rate? Which means for every dollar of revenue how much should account for the labor cost? Next examine your cost of software or direct expenses that each customer incurred. Are you profitable at that point per customer?
It may take a little time but one by one you can see how profitable your business is and can make better pricing decisions from there. My experience has flushed out many decisions that needed to be made such as:
- Is this the right person for the job?
- Is this the right software or can we get the same results with a different one?
- Can we do more the customer or should we be doing less for the price?
- Is this the right customer for our firm?
- Can I provide more value and increase the rate?
- Is the customer willing to do more footwork and help make this a more efficient process?
- Will this blow up the whole relationship?
Pricing decisions are not easy but these are necessary requirements in running a business. Intentional pricing and understanding the revenue drivers in your business will not only help you be successful but will help you build the confidence in your decision making.
If this really helped you understand more about fixed pricing and some of the complexities of it, please let me know. If you are in the middle of figuring this all out we can help. We are just a quick email or phone call away.