Determining the best way to charge for your company’s services is a challenge that many professional services organizations (PSOs) face — and unfortunately, there is no right answer. Welcome to the age-old debate that more than 28 million small businesses in the US have to grapple with!
The two most common pricing structures service-based business owners consider are hourly and project-based. Let’s dive into the details of both pricing structures so you can weigh your options and assess whether you’re company is charging what you’re worth!
When should you opt for hourly pricing? Elle Smith of Demand Media strongly advises to go with this option, “when you’re not certain of the job’s parameters, such as the deadline, revisions or approval process.”
It makes sense, then, that the most obvious benefit of pricing your work based on hours spent is that you will be adequately compensated for all of the work your company has performed on any given project.
And thanks to project management tools, you can avoid the guesswork of project estimation and billing. For example, rather than charging a flat fee for a project, which could potentially undercut the amount you get paid versus the amount that you worked, by tracking all time spent with a time tracking tool, you can ensure you’re billing accurately and being compensated fairly.
While hourly pricing might seem a fool-proof way to proceed, keep in mind that hourly projects have a tendency to lack in efficiency because there are no explicit deadlines. A recent study conducted by Salary.com revealed that 89% of workers admit they waste valuable work time on a daily basis.
Once a client is billed for an hourly project, they may choose to scrutinize the amount of time spent on a specific tasks and complain about paying the full amount. The best way to avoid this is to use project management tools that track time and tasks so you can offer up documentation of all work performed for the client.
On the other hand, if your employees perform their tasks expertly and quickly, you could be in a position where your company is not being compensated for the full value of the services that you’re delivering to the client. And this is where project-based pricing comes into play.
With project-based pricing, a flat fee and deadline have been negotiated in advance. If your company routinely delivers results on-time and with little to no revisions of the work required, you might want to consider this pricing structure.
Why? Because unlike hourly pricing, project-based pricing will help you avoid selling yourself short in terms of how the services you perform (including the long-term value) are reflected in your revenue.
The most glaring disadvantage of this pricing structure can be summed up in two words — “scope creep.” The Business Analyst Times defines scope creep as “uncontrolled change to scope that has an adverse impact on the project and where the client is usually unwilling to bear extra costs or extend time.”
Simply put, any delays or extra revisions that your project is subjected to will bleed into your profit margin. Project management tools can help you manage scope creep by allowing your employees to monitor the time they spend on specific tasks. Time tracking tools also help you to better estimate pricing for similar projects in the future to ensure profitability.
If your organization is looking for ways to increase accountability and up the efficiency factor in your office, it might be time to look into business management software. What are you waiting for? Sign up for a 14-day free trial today.