What Is Flat-Rate Pricing?
Flat Rate Pricing: A simple way to set prices is through flat-rate pricing, in which a person or business charges a set amount for a service, no matter how long it takes to complete it. A flat rate is a “fixed fee” or “flat fee” price.
In a flat-rate pricing approach, all costs—fixed, variable, indirect, and direct—are added up, and the price is set. Changes in the cost or the amount of time it takes to complete a job have no impact on the customer.
Businesses and customers can quickly determine costs when billed a set fee for services. This is because they don’t have to think about all the little things that can add up over time.
Synonyms
- Flat-rate pricing strategy
- Flat-rate billing
- Upfront pricing
Why Companies Use Flat-Rate PricBusinesses should charge flat fees instead of hourly rates for several reasons.
- Flat rates honor hard work and efficiency. When companies trade their time for money, they often put off projects so they can bill for more hours. As long as the service provider can do their job well, a flat-rate price pushes them to work faster and more efficiently, which increases their earning potential.
- Customers can understand it better. People who use flat-rate services don’t have to worry about secret fees or spending too much. They know the price of a service upfront, which helps them budget and make customers happier.
- It’s easier to sell. Service providers can set costs based on the type of work needed or on a set price per service. People understand flat fees better, either way, making selling easier.
- Businesses can plan for their cash flow. Companies that use flat-rate prices can better predict their cash flow over time and how much they’ll make from each service within a specific time. This leads to better value attribution. When a business sells the value-add instead of the time it takes to do a job, it can charge more for its services. • Higher scalability with productized deals. This helps them stand out from the competition and makes their price sense. Most service-based businesses don’t have a steady income stream, making it hard for them to grow. Companies can make productized offers that can be sold repeatedly with flat-rate prices, increasing the ability to grow.
Who uses flat-rate pricing?
Most businesses that charge a flat rate for their services offer tasks that can be finished in a certain amount of time.
This includes accountants, attorneys, software developers, web designers, publicists, copywriters, and other professionals whose work is typically subject to quality standards. This is different from goods, which must be tested or inspected before selling.
Plumbing, HVAC, car repair, and electrical work are examples of physical labor services that often use flat rates for many of the services people need.
These professional services usually charge flat rates for everyday tasks and variable rates for one-of-a-kind jobs.
Service subscriptions with a set price can also use a flat-rate price. Grocery shops and food delivery apps often offer flat-rate delivery for online orders or loyalty programs that give shoppers who buy from them flat-rate discounts.
Most shipping companies, like USPS, UPS, and DHL, charge flat fees for each package, regardless of how heavy or small the item is.
Things to think about when setting flat-rate prices
Before setting a fair price for a service, businesses need to consider a few essential things.
Find out about the market.
Service providers need to know how well the market will react to it to see if they are eligible for flat-rate prices.
Complex price models, like quote-based pricing, are sometimes better for the market’s needs.
For example, long-term contracts with changing prices are standard in business-to-business manufacturing.
Any way you look at it, studying the market for price flexibility can help you determine if flat rates are the best option and what those rates might be.
Write down how much the service costs.
To set the right flat-rate price for a service, you need to know the direct and secondary costs.
Direct costs, like supplies and labor, involve providing the service. Overhead costs like rent, insurance, utilities, marketing, and materials are indirect.
Direct and indirect costs should mostly be set for the flat-rate model to work. If too many costs change, it will be hard for business owners to make money with a fixed fee.
Think about non-local costs.
External costs hurt a third party, which means a person or business is not providing the service.
For instance, a landscaping company might charge a flat fee, but they must consider how much it costs to remove all the trash and garbage after each job.
In the same way, a distributor who offers flat-rate shipping services needs to think about how burning fuel to get packages to their destinations affects the earth.
Check to see how easily the service can grow.
Flat rates tend to work best for businesses when a service can grow. Suppose a plumber can put in a new tap in two hours.
Assuming they charge $500 for the installation and pay a worker or contractor $50 an hour, they should make around $400 per installation.
The flat-rate price and the service (and the time it takes to do it) stay about the same as the company adds more contractors and offers more services.
However, if the same plumbing company were hired to put pipes in a new bathroom, the job would take longer and cost more, depending on how complicated it was.
Because the work is so complicated, it would take more research before a price for the service that makes money could be set.
Take into account the cost of getting a new customer (CAC).
When setting a flat rate, you should also consider how much it costs to get a new customer.
When a company sets its flat-rate price, it must consider the cost of getting a new customer and providing the service.
If they don’t, they will lose money even if their service makes money.
How to Figure Out Prices for Flat Rates
The easiest way to explain how flat-rate pricing works is to say that it is the total cost of doing business plus a markup.
That is, businesses need to figure out how much it costs to provide their services, plus any other costs, and then add a certain amount for profits based on what the market will take.
Let’s say a company offers web design services.
Some site design services charge for their time, what they use, and any software or outside tools. On top of this, there may be costs like rent, bills, and marketing that need to be paid for.
The service provider can set a fair price once all these costs are added and a fair markup is added. The markup should consider the business’s goal to make money and the competitive market.
What are the pros and cons of base rates?
Flat-rate pricing has pros and cons, just like any other way of setting prices.
Pros of charging a flat rate
- It’s easy to budget and make long-term plans with flat rates.
- The price doesn’t change, no matter how big or complicated the service is.
- Providers can make more “per hour” than they would with an hourly rate.
- The business can offer “package” services to meet various needs.
- Not having to deal with billing and price discussions costs less.
Customers think it’s worth it because their bill has no secret fees or charges. It’s easier to reach profitability goals because they are more apparent.
Cons of Using Flat-Rate Pricing
- It can be hard to know exactly how much money you will make ahead of time because prices stay the same no matter how complicated the service is.
- On a large scale, it only works if services are uniform and can be done repeatedly.
- Setting a fair price for a service can be complex and risky if the market won’t bear it.
- Customers might not trust the service if they think it will cost more.
- The business will lose money and income if it doesn’t charge enough for its service.
Technology to Make Pricing Efficient
Price optimization is still a big problem for service businesses. Luckily, technology has made it easier for them to control their prices.
Software for Setting Prices:
Setting prices for services isn’t a perfect science, so businesses use software to help them understand their data.
A pricing engine can help businesses determine what the market will bear by using algorithms and information from past deals to help them change their flat-rate prices.
Price waterfalls and price lists comprise tool features that help businesses determine how much their services cost and what prices will make them the most money.
CPQ
CPQ software makes it easy and quick for customers to get correct estimates and quotes. CPQ can save a lot of time for businesses that offer flat-rate services because it lets them set up their services and make project quotes with just a few clicks.
CPQ bundles help businesses ensure that all their services are priced similarly. This makes setting up bundle pricing easy and ensures customers are charged the right amount for each service.
Even if a company only gives quotes, CPQ makes it easier to determine how much its flat-rate services cost.
Getting paid
When you use billing software, everything is taken care of automatically, from making invoices and sending them to customers to keeping track of payments and handling subscriptions.
Payment software also makes it easy to set up recurring payment plans for businesses that offer flat-rate services. This saves time and effort that would have been spent entering data by hand.
