How your business structures pricing impacts everything from profitability to brand reputation. As a service-based business, you have more pricing models to choose from than a product-based company.
Service companies can offer one of the most customer-friendly pricing models: flat-rate pricing.
With flat-rate prices, customers don’t have to worry about runaway costs. They know exactly what they’ll pay upfront. That gives them more confidence. And it might give your business more sales.
But how do you know if you should use a flat-rate pricing structure?
Before deciding if flat-rate pricing is right for your business, you need to know the pros and cons and how to calculate it. This article covers all of that and more.
What Is Flat-Rate Pricing?
A flat-rate price is a fixed fee a business offers upfront before starting a project. It’s a pricing model used for software, shipping, and home services work.
Flat rates don’t hinge on typical pricing factors that vary per project. That means you don’t have to factor in all of these considerations for every job:
- Hours of labor
- Materials used for that particular project
- Difficulty of the project
So, how does flat-rate pricing work?
Your business decides on a fixed price for a particular service. Then, you charge that set-in-stone fee for every customer. For instance, a landscaping company might charge $150 for a residential mulch installation. A plumber might use a flat fee of $200 for all small repairs.
Because of how flat-rate pricing works, the true cost of the service compared to the charged flat fee may vary from job to job. That means your net profit could vary per project. Let’s look at the landscaping example to see how this works.
Say one home requires 20 bags of mulch and two hours of labor. Knowing this, you estimate your business will spend $80 on labor and materials. That leaves you $70 in profit.
Another job down the street that requires 30 bags of mulch and takes close to three hours might have an actual cost of $90, leaving you with $60 in profit.
That means you could have earned more if you priced the second job by breaking down the supplies and labor.
On the other hand, you might attract both of these jobs because of your fixed price. People tend to prefer flat rates when making purchasing decisions.
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Pros of Flat-Rate Pricing
Using a flat-rate pricing model has benefits for both your business and the customer.
How Flat-Rate Prices Benefit Businesses
- You can generate a predictable income if you know your direct costs. Simply set your fee by factoring in your indirect and direct costs plus your desired markup.
- Once you set your price, you don’t have to spend time generating estimates. That means you could potentially save time and money in generating estimates for every job.
- This pricing model is simplistic. As such, you might be able to attract customers who want a quick, simple solution to their problem.
How Flat-Rate Prices Benefit Customers
- With a transparent, upfront price, customers can properly budget for the expense. That makes it easier for them to plan ahead.
- A flat fee can help to build trust. Customers know the value they’re going to receive from the get-go. They’re not left worrying about how much a project will cost.
- A flat-rate price is fixed. That means there’s no room for surprises or arguments. There’s no chance the final cost will exceed the estimate.
Cons of Flat-Rate Pricing
While this pricing structure can be the path of least resistance for both customers and service-based businesses, there are a few drawbacks to be aware of.
Challenges of Flat-Rate Pricing for Businesses
- Estimating what a project will cost can be difficult in some cases. As a result, you might lose money on some projects.
- Unexpected difficulties could increase the scope of the work, which can lead to a smaller profit margin.
Challenges of Flat-Rate Pricing for Customers
- A technician might rush the job, which can lead to a lower level of service quality.
- Depending on the service and the cost, the flat rate might be more expensive than an hourly rate.
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Flat-Rate Pricing vs. Hourly Pricing
Hourly pricing is another pricing model used in the home services industry.
Here’s how it works:
1. Your business charges an hourly rate for a service.
2. The hourly rate builds in the price for your technicians or subcontractors. It can also include your business’s direct and indirect costs.
For instance, you might pay a technician $35 an hour. However, you might charge your client $85 an hour, $50 more than your labor cost. That $50 per hour of labor might cover marketing, business insurance, rent, your income as the business owner, and other expenses.
Just as you would consider these indirect and direct costs when setting your fixed-rate pricing, you would also factor them into your hourly pricing schedule.
3. Then, the final cost depends on how long it takes your workers to do the job.
If the project turns out to be more difficult than expected, you won’t have to pay your workers more money out of your own pocket. The customer pays for the time spent.
Is hourly better than fixed-rate pricing?
The reality is that they both can be a good fit. What’s best depends on the details.
Flat-rate prices are good for jobs that don’t entail complexity, customization, or highly technical work. That’s because this pricing model favors quick jobs that can be performed repeatedly to make a profit.
For instance, a home cleaning company might take two hours to clean a two-bedroom home. It charges $200 for the service, knowing it can pay two cleaning professionals $20 an hour for the service (for a total of $80) and still cover cleaning supplies used, transportation, and indirect costs like business insurance (which averages out to $20 per job).
By charging a flat rate, this business can attract more customers. It also can predict future profits because it knows how much it nets per job. In this case, that’s $100.
On the other hand, a home building company that uses subcontractors of varying skill levels would be better off using hourly pricing.
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Let’s say a contracting business is hired to install a new shower. It has to cover the hourly rate of its subcontractors, as well as materials like tiles and fixtures.
If the shower installation is simple, it might take half a day to complete. If it’s complex, it could be an eight-hour project or longer.
There’s also the level of craftsmanship required. If you need to hire a highly experienced tiler to lay the tiles, you’ll have to pay a higher hourly rate.
If you used a fixed price in this scenario, you could lose money on the job if it turns out to be a time-consuming or difficult project.
That’s why, overall, an hourly rate works well for large or complex jobs. These types of jobs have a lot of variables that impact the price, making it difficult to accurately predict the scope of work. With hourly pricing, you can ensure your business always makes a profit for large jobs.
However, there is a downside to hourly pricing. You have to spend time creating estimates for your clients for every project. Also, if you quote less than the final cost, your client might be unhappy. This is true even if your pricing was 100% fair.
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How to Calculate Flat-Rate Pricing
Before running with the flat-rate pricing model, you need to know how to calculate a flat-rate price for your services.
You can calculate your flat fee if you know your:
- Hourly rate
- Average number of hours for the service
- Cost of materials
- Markup percentage
Here’s the flat-rate pricing formula:
(Hourly rate x Number of hours) + (Cost of materials + (Cost of materials x Markup percentage)) = Flat-rate price
Let’s look at an example to see how easy it is to calculate your fixed price.
An electrician charges $90 an hour. They want to determine a fixed fee for ceiling fan installation.
- It takes about 1.5 hours to install a ceiling fan.
- The cost of materials is $210.
- The markup is 30%.
The electrician can plug these numbers into the flat-rate pricing formula to calculate the price.
($90 x 1.5) + ($210 + ($210 x .30)) = $408
When to Use Flat-Rate Pricing
Flat-rate pricing works well when you know the scope of work. Basically, if it’s unlikely the cost of materials and labor will vary much, a simple, straightforward flat fee can be a great way to attract customers and simplify your pricing structure.
Here are some scenarios where flat-rate pricing can be a good idea:
- You sell a lot of that particular service.
- It’s a small job that can be performed in an hour or two.
- It’s a quick and repeatable service, such as mowing a lawn or installing a standard fixture.
You might also want to use flat-rate services if you’re struggling to compete with other local businesses that offer lower or more convenient pricing.
All of the following are examples of services that work well with flat-rate pricing:
- Rodent control
- Mosquito protection
- Lawn care
- Residential house cleaning
- HVAC system replacement
- Plumbing fixture replacement
- HVAC system seasonal servicing
- Electrical panel upgrades
- Light fixture installation
- Gutter cleaning
- Landscape lighting installation
On the other hand, projects that aren’t easy to complete and repeat aren’t necessarily a good fit for flat-rate pricing. Here are some examples:
- Kitchen renovations
- Bathroom renovations
- New decking
- Smart home wiring
- House painting
- Hardscaping installation projects
Start Taking Advantage of Flat-Rate Pricing Today
Is your pricing model complex? Or maybe your team is spending too much time going on-site to create estimates for projects that aren’t that big. Either way, flat-rate pricing can help. With a clear, upfront fee, your business can:
- Attract more business
- Save on the time and money spent creating per-project pricing
- Benefit from more predictable profits
Here’s how to get started
- Identify services that are a good fit for fixed prices. What quick and repeatable services does your business offer? Make a list and choose two to three to trial with a flat rate.
- Calculate your flat rate. Use the formula to determine your price.
- Update your pricing. Set the new pricing on your website. Share it with existing customers through email, social media, and other channels.
- Track the results. Look at your sales numbers. Compare them to what you were doing each month before the price change.
- Be flexible. If a particular service turns out not to be a good fit, switch to hourly pricing.
The key is to get your pricing strategy right for every service. Doing that will help you increase profits and build better relationships with your local market.
If your customer base likes the flat-rate pricing, trial other services with a fixed fee. Flat rates can be a win all around when done well.