Pricing is among the foremost significant decisions a corporation can make about its market strategy. And yet, for several businesses, it’s a choice that’s made hastily. Or, worse, it’s not made in the least and may be a tactical execution instead of a strategic imperative.
Today, we’re going to check out two common pricing models employed by service providers, what they’re, the pros and cons, and when to use them.
Time and material pricing
Time and materials pricing (T&M) is when a service provider bills a client for the time a project takes and therefore the cost of the materials that enter it.
An easy example of your time and materials may be a mechanic. Mechanics overwhelmingly charge on a time and material basis — you buy their time, and you buy any parts they need to shop for to repair your car.
Pros of your time and materials pricing
T&M pricing offers more flexibility when it involves the service provider. For instance, if the project finishes taking longer than anticipated, you’re not assuming any risk since you only bill for the time used.
Alternatively, if the parts find themselves being costlier, then you’re again covered by the service provider since you’re not eating that rise, but rather passing it on to the client.
Of course, a project may be available under budget and under time… but that’s a less common scenario.
From the customer’s perspective, T&M pricing is usually about buying access to the expertise, instead of a selected deliverable. An honest example of this is often an ingenious agency. They could bill supporting the time used, since a corporation won’t know once they sign the contract exactly what marketing campaigns they’re getting to run.
Cons of your time and material pricing
The main problem with T&M is forecasting and predictability.
From a service provider perspective, it’s unclear what percentage resources you would like to place against a project — meaning it’s difficult to plan your business for other clients.
On the flipside, for the client it’s difficult to plan cost and time accordingly, since the project can potentially take far longer and price much more than you anticipated.
- When to use time and material pricing
- The scope of the project is unclear
- The parameters are likely to vary over time
- The project features a very long timeline and murky outcomes
- The deliverables are varied, interdependent, and sophisticated
Fixed price pricing
Fixed pricing is when a project is fully scoped at the beginning and a complete amount is agreed up front. The value of the materials, labour, and time is all baked into the ultimate number.
If we return to our mechanic example, they could charge a hard and fast price for routine jobs that they know the value to deliver. as an example , replacing your windshield wipers could be a fixed-cost project because they skills long it’ll take, they skills much the part costs, and there’s not tons which will fail to massively extend the project timeline.
Pros of fixed price
The main benefit is predictably for the client and therefore the service provider.
For the client, the value of the project is agreed up front, which suggests that they will plan their spend with tons more accuracy.
And for the service provider, it’s a predictable time and price investment, in order that they can resource plan with their team more accurately.
A secondary benefit is that fixed price projects are often partially or wholly paid up front, instead of as goods are delivered. For a few service providers, this will ease some much-needed income concerns, and provide them the space to reinvest within the business.
Cons of fixed price
The primary con of fixed charge projects is the distribution and allocation of risk.
While fixed price projects should have extremely predictable and well-defined scopes, there’s still inherent risk in any project — and if it runs long or finishes up costing more, the service provider has got to eat that cost.
When to use fixed price
- The project is straightforward with few deliverable
- Requirements and success criteria are well-defined
- Deadlines are agreed upfront by all parties
Conclusion
How you price your work, or how you purchase services, may be a huge decision. it’ll impact not only what you deliver and obtain, but also the whole working relationship you’ve got with the opposite party.
Time and material pricing results in a more collaborative working experience as you team to unravel a posh problem. Fixed pricing may be a little more hands off, and is great once you just want the sausage, but maybe don’t mind how it gets made.
There’s nobody with a single account which one is best. Sometimes, the pliability of T&M pricing is what you would like. Other times, you only need a known price for clearly defined work.
Because pricing is ultimately a tool like all others — it’s not good or bad, it’s about selecting the proper one for the work.
