Random Lessons Learned About Fixed Fee Pricing

Fixed fee pricing is something that I’ve been implementing for the last six months.  Instead of offering a client an hourly rate — which they keep paying until a solution is reached — I’ve started to offer a fixed price to provide a well defined service.

The client approves the price in advance. The work begins.

At least that’s the theory.

Most of the time the fixed fee works great. There’s no more rushing to get off-site because if I stay longer the bill will increase. I’m free to return as often as I like until the issue is fixed — and the client no longer has to worry how big the bill is going to be — because it’s all been agreed upon in advance.

Like with any change – there are speed bumps along the  way. I’ve run into a few which I’ll list here in no random order.
The major lesson that I’ve learned?

Clients Used To Hourly Billing Think Your New Billing Means “Not To Exceed”

Clients used to paying by the hour sometimes/often/always — feel fixed fee means “not to exceed” – one lesson I’ve learned is NEVER EVER put a number of hours cap onto a proposal that is fixed fee. Those two are incompatible. It’s either fixed or it’s not.

For example — when I have proposed “on-site visit to work on several open issues – up to an 8 hour day” — the client automatically translates this to mean ” I will be there for 8 hours and if I’m there less will bill you less”… almost always if I’m on-site less than the “hourly cap” then I receive a call asking why the bill is so high because I wasn’t there for x hours.

I’ve found in some instances clients don’t have one major issue that they want to you to work on. Rather they’d like you to visit to address a “punch list”. These are the trickiest.

I never put an hourly cap on projects any longer – instead if the project isn’t defined by a scope document (which it should be ) I’ll phrase it as single site visit (avoiding the use of any term like “day” or “hours” which I think also prompts people to expect you’ll be there x hours).

Any mention of a number of hours puts the client into the “not to exceed” mindframe. Instead I’ve found it better to phrase the project based on the task to be completed (scope – or desired outcome) and not the time it will take.

Yes, this means your fee will be higher than a “best cases” hourly project because you must factor in the unknown.

Just Come On Down = Difficult To Price

The hardest projects to provide a fixed fee are those where the client calls and asks you to “come on out to work on a whole list of issues or questions that we have”. The problem is that ahead of time you have no idea what the client wants or how long it will take. This is probably 1/3 of my project (non-upgrade) business.

I’m not yet sure how to combat this though I think the  approach where a client can purchase a higher level of support that includes on-site might be the way to go for good clients (I wouldn’t offer this for new orphans unless the fee was high).

I’ve tried quoting $ xxx per visit — and unless you’re sure the visit is going to run a certain amount of time then it’s tough to quote $1,200 when the client has a 15 minute question.

Then again those types of fees probably will reduce the number of inefficient on-site meetings. I’ve found that clients have a very short attention span and often don’t pay attention to your verbal initial quote (which is why I’m using Freshbooks to send out quotes that must be approved electronically before I will even schedule a time to go on-site).

Ideally I’d like to develop a standard “un-determined agenda”  fee of say — $800.

If the client calls with no idea what they want to meet about (usually they know but they haven’t bothered to formalize it) and just wants you to “come on down” — then there has to be some type of middle ground fee that’s not unusually high but also isn’t so cheap that you’re living at a client site all day for $100.

I am still getting a LOT of questions about  (a) so what would be the number of hours and (b) what is your rate for (pick a task).

Try as hard as I might —   clients are very well conditioned to ask this.

I think it’s also a factor of the market. I really don’t care if a random (non client aka often price shopping) web visitor asks this — but it’s very tough to explain and work around to existing clients.

In my experience the classroom explanation of “just tell them hourly would be more” just doesn’t flow very smoothly.

I’ve no resolution to this yet other than raising my hourly to $400 and explaining “our hourly rate is $400 but most people find a fixed price is cheaper”

Other than these items the fixed rate method of pricing is working well. I get a lot of comments from resellers about how they could never price an engagement as fixed fee because if there’s a bug they’d “lose their shirt”.

In reality fixed fee pricing has to be be a middle ground. Don’t price it as if everything will go perfectly (it won’t). Don’t price it as if you’ll have to live at the client site (in all likelihood you won’t).

Instead what has worked well for me has been developing three options (as taught well by Ed Kless and John Shaver in their pricing classes).

Option #1 – Bare bones. Change orders applicable to just about anything that isn’t on the scope list. Assumes that the client will participate heavily on their end.

Option #2 – We carry more of the heavy lifting and include more common tasks like workstation setups, etc.

Both option #1 and #2 exclude hidden damage. If there’s a damaged data file. Program bug that requires a Sage case. The client is presented with a change request. This is the answer to how you exclude unforeseeable major issues from your engagement.

Option #3 – For a higher price we do it all – including cover hidden damage and following through on support cases.

The key to the above pricing is the options. You don’t necessarily have to throw in the kitchen sink for one low price. Give a range of pricing options and allow more budget conscious clients to pick a lower level of service. If you encounter bugs or damaged data on a low level of service engagement — then the client has the ability to sign a change request or fix the issue themselves.

On a higher level of service – you’ve already (hopefully) built one or two bug issues into your pricing.

Fixed pricing works best when you judge it not based on one individual engagement but all of your engagements. You may lose money an engagement but over the course of all engagements find that you’re making more money – and your clients are far happier which means they return to you for additional project work over the course of the year.

About admin

Comments

  1. Great post, we have been providing fixed fee implementations now forover two years, our pricing options are also based on Ed Kless’ pricing classes.

    I totally agree with your post, their are customers who are entrenched in the hourly billing model, it is tough for them to see the value in fixed fee. These clients are for sure the most difficult to move over to fixed fee.

    For the most part offering 3 options has reduced the the objection of price, as they can clearly see what they are getting and more importantly, what they are NOT getting in each option. We even offer a “bundled” discount in option 2 & 3, sort of like an extra value meal. If you break the options seperatley the cost will be higher than if it is bundled.

    The most difficult part of this equation, is when you have offered the fixed fee, and the customer come back asjing for it to be broken out into houly as they need to substantiate the amount of “time” somehting is going to take. I go thorugh the same discussion that an hourly estimate will be higher, than the fixed fee and that their are no guarantees offerd on time and material jobs. Some client still want to see the hourly breakdown???

    How do you get around this hourly breakdown request without taking the solution away?

    • I have worked around the “what are the hours” by making my rate be $400.

      I’ve found that in order not to come across as completely arrogant I usually have to give the client a call or provide some other type of advance information on why we price on a fixed cost.

      People still persist – and I’ve been doing fixed price annual phone support for must be the last 7 or 8 years and the key for that has always been not to offer another option.

      Have some clients left or found another reseller? Absolutely. I think in the majority (but not all) of those situations they were clients that were looking to ask free questions or call only when they perceived their question was worthy of a bill (they’d still call other times but ask not to be billed for a quick call).

      So yes it thins down the prospects/clients but those who are left are typically A to A+ level clients.