Setting up a pricing model for any product or service can be a tricky one. Whilst it is important for a business to be making a profit, the prices also need to be fair and in line with the competition. One of the main decisions that need to be made is whether to charge a fixed fee for services or a flexible contract.
What are Fixed Fee and Flexible contracts?
A fixed fee contract is when a previously arranged, specific amount is charged. The buyer pays an amount for the job to get done. There is little room for negotiation and the price is fixed regardless of the cost of production.
A flexible contract is where the amount that is charged is based on the cost of production plus a fee or percentage for the service. Although they may get an estimate before the service is provided, there is no ‘actual’ price agreed prior to work commencing.
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The Pros and Cons
Which model type you use comes down to a number of factors including what service you are offering, the potential for big cost differences and the level of service that you want to offer customers. It’s an important decision, so both options should be strongly considered before deciding.
Fixed Fee Pros
- Allows for budgeting for both the buyer and the service provider. A lot of people like the security of knowing exactly how much they will be paying.
- You can charge a higher price to cover any potential issues such as production delays or staff absences.
- Time is money, and sub-contractors who have agreed a fixed price are more likely to submit a job on time and have it done properly, with detailed plans to ensure they don’t lose money.
Fixed Fee Cons
- Unexpected costs will have to be covered by the service provider, which will potentially eat into your profit. For this reason you may have to charge a little extra.
- Changes in the project might mean that you’ll have to re-negotiate the price with the customer. This is why it’s important that you detail in the contract exactly what you’re offering for the fixed price.
- Sometimes by focusing on a fixed price, the quality of work can differ as you’re ‘only getting £x’.
Flexible Contracts Pros
- You are guaranteed to make a profit. By using the model, price = cost + (% or fee), you will ensure that you will always earn your money regardless of unexpected issues.
- Using a flexible contract allows you to cover the cost of price rises with no added expense to your business.
Flexible Contracts Cons
- You can lose out on additional profits if a consumer thinks that your services are worth more than you are charging.
- All the pricing information must be 100% accurate or the entire structure can be in question, and you could end up losing money.
- As the price rises, so do the service providers’ profit. There can be a temptation to let things take longer or add in extra costs at the expense of the buyer.
- Ensuring a fair price for both customers and businesses isn’t easy. Each contract type has its advantages and disadvantages and it’s down to the business to decide which one best suits them and their customers.
You can lose out on additional profits if a consumer thinks that your services are worth more than you are charging.
All the pricing information must be 100% accurate or the entire structure can be in question, and you could end up losing money.
As the price rises, so do the service providers’ profit. There can be a temptation to let things take longer or add in extra costs at the expense of the buyer.
Ensuring a fair price for both customers and businesses isn’t easy. Each contract type has its advantages and disadvantages and it’s down to the business to decide which one best suits them and their customers.
