Service-based businesses have two options for billing methods: flat rate or hourly. There is a lot of debate about which method is better. Each pricing model has advantages and disadvantages that may affect your business.
Every service company is unique, so choosing the right payment model is subjective. Whether you’re self-employed or run a business, it’s important to consider the benefits and impacts of each system.
This article acts as a guide for both flat rate and hourly billing systems. Let’s break down the pros and cons of each payment option.
Understanding Flat Rate Pricing
Flat rates allow technicians to charge a set payment per project or service. This means that regardless of how long the project takes to complete, you will still be getting paid the same.
If a tech is able to complete the job in 1 hour, they get paid the set price. If the tech takes 4 hours to complete the same job, they will still get paid that set price.
When is a flat rate the best choice for a small business?
Flat-rate pay can be a good option for many service-based companies. Some businesses use flat-rate pricing to simplify projects.
This pricing model enables a set price for each project, regardless of outside factors. That can save techs a lot of time, resources, and energy. An easier job means that these businesses may also be saving money.
Here are some of the most beneficial situations for flat-rate pricing:
If you’re self-employed, flat-rate pricing could save you time and earn you money. If you’re efficient and self-motivated, a project may take you less time than others. This pricing model allows you to charge based on the service rather than how long it takes.
If your business offers a set of standard services, flat-rate pricing could be the right choice. It allows you to charge for simple repeat services. Payment is straightforward and can make the experience easier for the customer.
Flat-rate pay might be best for projects that don’t require a big time investment. Techs get paid for the quality of their work rather than for the hours it took to complete it.
Some advantages of the flat rate pay system:
Businesses that implement a flat-rate payment system see a variety of advantages. From improved customer satisfaction to increased income, your business can reap these benefits in many ways.
Customers tend to prefer flat-rate pricing. It offers an upfront cost for the service, so they know exactly what they’ll be paying. Transparency boosts the customer service experience, which brings in more business.
Above average productivity
If employees are paid per project, they may be motivated to complete more of them. This can incentivize them to improve their skills so they can be faster and better.
More income potential
With additional productivity, businesses are able to take on more projects. More projects, with appropriate prices, mean more income.
Some disadvantages of a flat-rate system:
Like any component of business, there are often disadvantages to consider. While a flat-rate system is great in many ways, there are a few drawbacks.
With flat-rate pay models, if business slows down, the paychecks do too. A worker’s income can take a dip with slower days, lack of inventory, and many other unpredictable factors.
Cutting corners to save time
A potential downside to flat-rate payment is that it might encourage cutting corners. If technicians rush to complete a job and get to the next one, things may slip between the cracks.
May distract from customer service
Again, this is where employees might let things slip. If techs focus on speed, they may be less focused on the customer. Premium customer service is essential to the well-being of a business.
Exploring Hourly Pricing
Hourly pricing allows a business to get paid for the time it takes to complete a job. Rather than charging per service, you charge for the time spent on-site. You can determine hourly rate using a number of factors.
Technicians get paid from the moment they clock in until the moment they clock out. Their salary is based on hours worked. If a tech earns $20 per hour, in a 40-hour work week they would make $800.
This allows pay to be scalable to the business’s needs.
When are hourly rates the right choice for a small business?
Hourly pricing might be the right decision in several situations. Some businesses prefer hourly pricing because it is more reliable for employees.
Hourly wages guarantee payment for all time spent working. This protects workers from being underpaid for more difficult projects.
Some situations in which hourly rates might be a better fit are:
If you’re just starting out, you may not be familiar with project estimates. Hourly rates can help you get familiar with your workflow. Before you can charge a set fee, you need to understand what each project requires from you.
If your business has an ongoing project, hourly pricing can be continually adjusted. If the project ends up taking additional time, you won’t get short-changed. This could apply to contractors, plumbers, painters—any home service business that may be on-site often.
New employees may have less experience in the field. They might take longer on projects, which could be a financial risk if using flat-rate pay.
Advantages of hourly rate pay systems:
Hourly pay systems also have many advantages to offer home service businesses. For some businesses, these advantages set them above other systems.
Hourly pay can be more predictable for employees. They know what they’ll make each day of work.
Accounts for job complexity
Service jobs can be complex and unpredictable. Hourly wages account for any mishaps or surprises that happen on the job. This way, techs get paid for any extra time spent.
Hourly wages are more easily comparable to competitors. Hourly prices are broader, while flat rates can be more specific to each service. This can help the customer compare prices. It also helps your business stay competitive.
Disadvantages of hourly rate pay:
Like flat-rate systems, hourly rates also have a potential downside. These limitations may deter some companies.
Unfortunately, sometimes, employees see hourly rates as an excuse to take their time. Running the clock up means that they get paid while the project drags out.
Limited financial opportunity
Hourly rates limit how much businesses are able to make in a week. It puts a cap on how much you can scale up your productivity and projects.
Keeping track of hours and time sheets can mean a little more work for business leaders. Bookkeeping gets more complicated when you have to factor in timecards.
Factors to Consider When Choosing a Pricing Model
There are many moving parts in running a service business. Choosing a pricing model can affect your business in many areas. Each system has many benefits for different components of the home service industry.
When considering which system to choose, you may want to weigh some of these factors:
Take into account the industry that your business operates in. Many home service providers will differ in how they offer their services. The types of services that your business provides, the scope of the work, and the frequency should be considered.
Customer satisfaction is essential to running a successful business. Managing a customer’s expectations is a crucial factor when considering pricing models. According to a recent survey, more than 11,000 homeowners prefer flat rate pricing.
However, hourly pay allows clients to pay more manageable costs for long-term projects.
Customers tend to be more satisfied with a simple, honest experience. Offering transparent pricing, simple billing systems, and automated payment platforms may improve this.
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As mentioned before, an hourly rate can be easier to analyze against your competitors. See what other businesses in your area are offering. Consider any perks or warranties that they include. Are these businesses offering hourly or flat-rate pay rates?
Knowing where your competition stands allows you to choose how you want to stand out.
Flat rates and hourly rates can have long-term effects on your business. Each option can elevate your business in different areas.
Flat-rate pay is a great choice for service providers who want to maximize revenue, avoid disputes, and simplify their books.
An hourly pay rate system is better to avoid financial risk, especially for complex and customizable services.
Knowing what your business goals are can help you narrow down what system will work best.
Growing your business while maintaining quality is a fine balance. Growing, maintaining, and scaling back all have a financial impact on businesses.
We’ve seen that hourly rates can be a little more limiting for revenue growth. However, this can help account for keeping things within a manageable scope.
Flat rate systems can offer more room for financial gain. With skilled technicians, your business can complete more jobs. This can mean increased income for each service.
Employees are the backbone of any business. Whether you’re self-employed or a business leader, the needs of the people doing the work should always be considered.
Take into account the impact of consistent and predictable pay. An employee’s skills and workload capability should also be factored in.
Accounting for slower months
Generating businesses in slower months can be difficult. It’s important to account for these lulls. If employees are getting paid per project, but there are no projects to complete, there may be some discomfort.
It’s important to consider this, especially if your business operates more seasonally.
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Conducting a cost analysis between charging a flat rate vs. hourly fee
Small businesses often have a delicate balance between overhead and revenue. Your pricing model should take this into consideration.
Run a cost analysis to help you calculate potential earnings for each system.
A cost analysis takes measurable metrics to calculate the benefits of each choice. Then, the final revenue impact can help businesses determine the pros and cons of a decision.
How to Conduct a Cost Analysis Between Flat Rates and Hourly Rates
Let’s look at a few of the steps business leaders can take to conduct an effective cost analysis.
Identify the scope.
Gather data on competitive pricing, your businesses’ revenue, and goals. You can use this data to create a framework for the analysis.
Evaluate the cost of the job.
Research the total cost of the job. This could be broken down by each project, each week, or each month. Always consider labor costs, business expenses, and materials. Add in how much you’d pay technicians per hour vs. per project.
You can also quantify nonfinancial factors. Assigning a cost to time, incentives, and productivity can impact the outcome.
Calculate the potential profit.
Use these expenses and your potential price point to calculate any potential profit.
Consider how much your business would earn with either system. Do this by either taking on more projects with a flat rate or saving some money with hourly rates.
Again, you can quantify nonmetric benefits. Things like employee satisfaction can factor into this calculation as well.
Calculate the total revenue and benefits.
Finally, subtract the cost of the job from the potential profit. Depending on the set of variables, this should show you the total revenue earned or profits saved.
Compare flat rate and hourly rate cost benefits.
Run a cost analysis for both flat and hourly rates. This data should show you the ROI for each. A cost analysis helps you determine which pricing method is better suited for your business.
Choosing the Right Pricing Model for Your Business
Every service business is unique. The pricing model can dictate not only how your employees are paid but also your overall revenue. Customers often prefer one pricing model to the other. This can either bring in or deter business opportunities.
Let’s walk through a step-by-step guide on how to decide between flat rate pricing and hourly rate systems:
Determine the types of services that you offer.
Your services will be one of the bigger indicators in this decision. Small-scale, one-off jobs tend to be easier for charging a flat rate. Longer, more unique, and personal jobs are better suited for hourly rates.
If your business is offering straightforward services, like door installation or dryer repair, then flat-rate is a great option.
If your business is contracting a new development or the installation of a complicated system, then hourly rates might be better.
Evaluate your customer base.
Customers determine the success of your business. We know that managing their expectations is vital. Now, it’s time to evaluate what their data is telling us.
What are they asking for when they book services? Do they book simple services or need more complex projects completed? Are they happy with your prices?
Read customer reviews and service reports and talk to your technicians. Knowing what customers need and want is a huge help. Then, you can evaluate which services and payment strategies will serve your business.
Consider the goals and capability of your business.
If you know your business goals and the capability of your team, you can choose which service suits this. Flat and hourly rates provide different benefits for service businesses.
If your team is ready to grow and take on new challenges, then scaling up with flat-rate pricing might be wise.
If your team is taking on big projects and wants to minimize financial wear and tear, then hourly rates could protect them.
Weigh in your cost analysis.
Once you’ve done your cost analysis, add the results to the mix. Solid financial data is hard to ignore when making an informed business decision.
Consider a hybrid model of flat and hourly rates.
If you can’t decide, you might try combining the two. Many businesses work with a hybrid approach. This system combines both flat and hourly systems. There are a few different ways to apply this.
Service companies can offer a flat rate for a service but begin to charge hourly if the job goes overtime. Overtime can be after a number of predetermined hours.
Businesses might also offer some simpler services at a flat rate. They can then charge hourly for other projects that might be more complicated.
As businesses evolve and grow, their needs might change. Shifting from one pricing model to another is common. You can customize by service or by customer choice.
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Implementing Your Pricing Model
Once you’ve narrowed down which pricing model is best for you, it’s time to integrate it. This means applying it to your employees, future appointments, and marketing.
Whichever pricing model you choose, stay transparent. Being upfront about pricing can encourage and maintain trust with your customers. A survey shows that 83% of customers value transparency above reputation.
Here are some practical tips for implementing your pricing model:
Incorporating some of these tips can help get your pricing model in motion. Staying on top of it can help launch your new or improved method without any hiccups or mishaps.
Set a competitive rate.
Whether using hourly rates or flat pay, make sure that your costs are competitive. Pricing strategies will shape customers’ view of the quality of your business.
Low pricing may imply to clients that your service is low quality. However, high pricing may convince them that they are being overcharged.
Communicate the pricing structure to your customers.
Whether you’re changing the pricing structure or just getting started, make your pricing model clear. Customers want to know what they’re paying for and how they’re paying for it. Any hidden expenses can trigger a loss of 39% of customers.
Monitor business and adjust pricing as needed.
Stay alert for market shifts, rise in the cost of materials, and any lulls in business. Monitoring any changes can help you either raise or lower prices as needed.
This also goes for shifting between pricing models. If your hourly employees are gaining skills and completing projects rapidly, switching to a flat rate could be smart. Vice versa, if your flat rate projects are taking longer. In this case, switching to hourly rates can account for any pay gaps.
Set up bookkeeping accordingly.
Between invoicing and bookkeeping, there is a lot of behind-the-scenes work happening. Ensure that the systems you’re using are best for the type of payment method you’ve chosen.
Quality invoicing options for small businesses can be found here.
Dial in your quoting system
Both hourly and flat rates require some sort of quoting system. This enables your clients to know what they’ll be paying for the exact service that they need.
Flat rates are fairly simple. Businesses can provide a rate book or pricing page on their website that lists the price of each service. For more unique services, your business can offer them a set quote for the entire service. This may require an evaluation first.
Hourly quotes can be determined based on a variety of factors. You could offer virtual quoting services or home visits to determine how long the project might take.