How should I price my services?
Written By Ethan King
There are many ways to price your services in a contract. Let’s discuss the pros and cons to four of the most popular choices. Just remember, there is no one-size-fits-all solution. Often, contracts will have a combination of various payment types.
1. Fixed Price
A set price for the service, agreed upon upfront. Fixed pricing can show up as a fixed monthly payment or a total amount paid at the beginning or end of a contract. For example, a $1.2 million contract, with $100k paid to the service provider a month.
Pros:
There is usually a clearly defined, narrow scope
Low administrative burden, so the service provider does not need track time spent working
The service provider can responsibly assess costs and personnel necessary to complete work in an efficient manager
Cons:
Scope creep, with the client asking you to do more and more for the same price
Unforeseen costs, resulting in a loss of margin
Even if there is a delay through no fault of either party, the delay can strain the service providers’ resources and prevent them from moving forward on deals with other clients
2. Performance Based
The amount paid to the service provider is based on the service provider meeting specific performance metrics or KPIs (key performance indicators).
Pros:
Service providers can usually charge higher rates by showing the value they are creating through their work
The required metrics, when properly defined, provide clear milestones and levels that need to be achieved for payment
Cons:
If the KPI’s are defined broadly, the client can keep moving the goal posts to delay payment
It can be difficult to adjust the KPI’s once they are already in place
3. Time & Materials (T&M)
The service provider receives payment for the actual time worked (hourly, daily, weekly, etc.), plus the costs of materials and expenses needed for the service provider to perform the work.
Pros:
The service provider can quickly start working, without the concern of overhead costs cutting into margins
It’s easier to adjust to the needs of the client and service provider over time by adding and subtracting personnel or changing materials
Margins are not cut if the initial hours the service provider thought were necessary for the project were underestimated
Cons:
The service provider’s administrative burden is increased, needing to track hours of personnel, expenses, and materials
Clients may be concerned about the materials chosen by the service provider, or the amount of time it is taking to complete the project
4. Subscription Model
The service provider receives an ongoing fee for providing service to the client, usually on a monthly or annual basis.
Pros:
The service provider has a constant revenue stream and improved cash flow from the client paying for the service
You can maintain long-term relationships and foster loyalty with clients
There is always the potential to upsell, or cross sell additional services that you provide
Cons
Customers may no longer see the value, and opt for cheaper prices from a service provider providing the same or similar services
Subscriptions can be ended abruptly which affects revenue and cash flow forecasts
As a service provider, consider which options fit your business model and clientele best. Do not be afraid to combine models either. An example is having a fixed price of 100k paid out in 10k increments monthly, and then an additional $5k for completing milestones each quarter. This way, you have ensured constant cash flow, but you are still motivated to complete the milestones. Contracts will usually include penalties or lead to termination, for not meeting KPI’s.
Note that these are specific to the provision of services. Tune in next month for pricing strategies for the sale of products.
Adam Yohanan is a transactional business lawyer with extensive experience representing companies, investors, and entrepreneurs in a wide range of high stakes business transactions.
Adam handles the small and large transactions in the life of a businesses, including mergers & acquisitions, entity formations, partnerships and joint ventures, investing and fundraising, commercial contracts, and dissolutions. His office can be reached at 212-859-5041.
Haley Kopp is a corporate lawyer focused on representing start-ups and small companies in formations, venture capital, angel investor financings, mergers and acquisitions, and general corporate matters.
Haley's diverse experience gives her a practical approach to solving complex business issues, whether guiding companies through financing rounds or corporate transactions. Her office can be reached at (619) 512-3652.
This guide is meant for educational and informational purposes only and should not be considered legal advice. It is essential to consult with an attorney or other advisors regarding all legal and other important matters.
