Charging for services is tricker than charging for products.
Charging for products is straightforward: The customer sees the price, they understand the value of the product, they buy the product. Everything is clear and transparent upfront.
It’s a bit different with services and so it’s not a surprise that businesses often wonder how to charge customers for services.
A customer purchases a service to solve a problem. But how (and who) decides the value of that service? The one providing it or the one receiving it?
Should the value be based on how important the solution is to the customer? Or should it be based on the value of the service provider’s time? Or should it be based on effort? Or can it be based on success?
This lack of immediate clarity on how services can be valued and priced can actually be an opportunity for the service provider to craft a pricing strategy that addresses the customer’s problem at the same time maximizes revenue for themselves.
If you’re a service provider and are wondering what’s the best way to charge for your services, let’s look at the various possibilities that exist.
You can pick one of these or build a hybrid by combining one or more to suit your market.
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How to charge customers for services? – 7 Revenue Streams Explained!
Here are the 7 ways in which you can set your price and charge customers for services rendered.
- Pricing based on Time & Materials
- Fixed Price per Project
- Pricing based on Success
- Pricing based on Savings to Customer
- Revenue Share with Customer
- Pricing based on Recurring Fees
- A Combination of the above
1. Pricing based on Time & Materials
Charging a customer based on Time and Materials is the surest way of covering your costs.
You could charge a flat rate for each individual working on the project, or you could bill on an hourly basis for the actual amount of time spent working on the project. You could also charge the customer for the cost of materials used in completing the project.
By using a time and materials pricing model, you can ensure that you are being compensated for the time and effort that you put into providing these services, irrespective of the outcome.
In Time & Materials projects, the uncertainty and risk are on the side of the customer, and they will want to know how much they will be charged at the end of the project.
So, you’ll need to make sure that you have a good understanding of how long the project could take so that you can accurately estimate how much time will be needed to complete the work.
You will also need to track the amount of time spent by each individual on each project so as to accurately bill the customer.
You’ll also have to ensure that all costs are being covered so that you don’t lose money on the transaction.
By being clear about the pricing model and keeping accurate records of time spent by each individual working on the project, you can ensure that you get paid for the services you provide.
2. Fixed Price per Project
When pricing for the services you provide, you could choose to charge a fixed amount per project.
In this type of pricing model, you will complete a specific task or set of tasks for a set price. Your customer will know exactly how much they will be spending and there will be no surprises for them.
This type of pricing can be beneficial for both parties involved as it establishes trust and allows the customer to budget for the project. It’s similar to purchasing a product at a fixed price.
But it can be risky for you, in case you misjudge the amount of effort or costs you will incur. So, if you have a cost overrun you could end up making less profit than planned or even lose money on the transaction.
If you choose to go ahead with a fixed price for a project, make sure that you have the necessary safeguards in case of surprises. A common surprise can be a last-minute scope change where the workload increases but the customer expects to pay the fixed amount. Make sure your contracts cover this possibility.
3. Pricing based on Success
The customer is hiring you to solve a problem in exchange for a certain amount of money. So, from their point of view, they don’t care how difficult it is for you or how long it takes you as long as you get the job done.
To better align your customer’s success with your success, one tactic you could deploy is to base your pricing on the successful completion of the project.
For instance, you could charge the customer for time spent on a project but include a bonus in case the project is finished earlier than scheduled. The bonus is then the pricing element that is based on success.
Another way to structure the deal could be to charge a fixed price for the project but at a lower amount than what’s common in the market. But then ask the customer for a larger “success fee” in case the project is a success.
Combining a traditional pricing model with a success-fee-based add-on can be a great way to get into a new customer account because you will lower the risk for the customer in the event of failure, but you will be amply rewarded if you succeed. This creates a win-win scenario.
4. Pricing based on Savings to Customer
If the objective of your services is to help the customer cut costs, then you could make a pricing offer where your compensation is tied to the amount of money that the customer gains as a result of the cost cuts.
Let’s say a customer has hired you to restructure the manufacturing processes of one of their products. If the restructuring is successful, the customer expects to cut costs by 20%. You could suggest a pricing model to the customer where you charge a lower amount of fixed cost for the project but ask for a 1% cut out of the 20% savings that the customer will gain as a result of your advice.
In such a model, the customer doesn’t have to find fresh money for you but is able to pay a part of your fees from the savings incurred. This is a great way to align customer success with supplier success.
It’s also a great way to retain a cheap customer who doesn’t want to pay a lot upfront.
5. Revenue Share with Customer
Just as you could share in the customer’s successful cutting of costs, as we have seen in the previous section, you could share in the revenue growth that a customer might enjoy as a result of your services.
For instance, if you’ve been hired as an online marketer to help a traditional brick-and-mortar business start selling online, you could tie your fees to the success of your client’s online venture.
You could provide a heavy discount on your normal fees and in return ask for a share in the online revenues that your customer will generate by implementing your marketing plans.
Such a pricing model will reduce the risk for the customer in hiring your services and give you the opportunity to share in the upside that will result from your customer being successful.
6. Pricing based on Recurring Fees
In this pricing model, a customer pays a fixed recurring fee at regular intervals in return for a certain amount of your time or effort.
For instance, if you are a graphic designer, you could ask your customers to pay a fixed fee per month for your services and in return, you could offer them a fixed number of graphic designs each month.
The benefit of this model to you is a recurring monthly fee that you can always count on.
The customer too will benefit from this model as you will likely charge a lower unit price in exchange for the guaranteed income that you will get each month.
So, in our example, you will charge a lower fee per graphic design to a customer who pays a recurring monthly fee as compared to the fee you will charge a customer who does not have a similar agreement with you.
7. A Combination of the above
There is a great opportunity to come up with hybrid pricing models that are a combination of one or more of the models we’ve seen above.
For instance, you could combine the Time and Materials based Pricing with Pricing based on Success. The T&M will cover your basic costs and reduce your risk, while the success fee can be the cherry on top of the cake which allows you to align your interest with those of your customer.
Similarly, you could combine Pricing based on Recurring Fees with Revenue Share with the customer. You could consider offering the customer a deep discount on the monthly recurring fee in exchange for a cut of the revenue growth that they could get by using your service.
Summary
While pricing for services is tricker and not as straightforward as pricing for products, it still offers enormous flexibility to build models which not only help maximize revenue for the service provider but also help align the customer’s interests with those of the service provider.
Each time a services project is over, the customer will look for alternatives – alternatives that are cheaper, better, faster, etc. Tight alignment between the success of the customer and that of the service provider is the essential element to building a lasting symbiotic relationship. And pricing can be used as the link that connects the two parties towards a common success.
In this article, we reviewed 7 ways how to charge customers for services. But as you must have realized, there are numerous combinations that are possible including offering services for free in exchange for something more valuable.
In case you are designing a pricing model for your services business, experiment and see what works in your industry and with your customers. Every services project is a sales job for the next project. And Pricing is a great tool to build an interdependent relationship between you and your customer.