1. Hourly billing
Basically, you charge for your time. This is simple. Lawyers, for example, are known for doing this.
This is a very easy billing method to understand. It is also fairly transparent, since you can share your timesheets with clients.
This obviously creates an incentive to work longer on a project. There is, therefore, not much emphasis on value. Also, there are limitations on how much money you can make. There are only so many hours in a day you can bill. You can’t bill for all the hours you spend puttzing around.
You bid on a project and the client will choose a winning bid. Often, the lowest bid will win. Government contracts are often done this way. The government wants, say, a street expanded. It collects bids and will usually select the lowest bidder.
There is an easy way to ensure you win the bid: price yourself lower than everyone else. There is also an easy way to risk losing money on the job: price yourself lower than everyone else.
You guarantee a client access to you for a specified amount of time in exchange for a payment. This is more common among professionals, such as lawyers, than it would be for a tech startup.
For you as the service provider, it is nice to get paid up front.
What you’re getting paid to do, however, isn’t linked to the value you add, which may make it harder to increase fees in the future.
4. Fixed Fee
This is common in IT, advertising, and some consulting companies.
For the service provider, it’s great to tell the client there is certainty in the fee amount. It’s also easier to provide a client more value, since any service provided above the amount of the fee should theoretically be seen as “value add.”
As a caveat, make sure you estimate your fees correctly. If you underestimate, may end up with an unprofitable project.
Here, you charge a percentage of the transaction amount in question.
This can be very profitable for you as you scale up. At a certain point, however, clients may think that you are simply and unfairly earning too much.
You charge a recurring membership fee (per month, per year, etc.) for access to certain services. This is common for many internet-based companies.
This can create a deep relationship with your customers, making them more “sticky.”
7. Percentage of improvement/cost savings
This is common in the consulting industry. You charge a percentage of the increased savings or profits for your fee. For example, say you’re a consultant and agree to take on a cost-savings project for a company. For your fee, you negotiate that you’ll get paid 10% of whatever cost savings you help implement. The more you save your client, the higher your fee.
This should be an easier “sell” to the client, since the service provider gets paid only if savings or profits are increased. There is also an alignment of interests: the service provider and client both want to maximize results.
Do your job too well and the client might actually be upset about giving you such a huge payout.
8. Contingency fee
Personal injury lawyers are famous taking contingency fees, where they get paid only if they are successful.
There is an obviously huge incentive to get results for your client. And, if done right, you can make huge profits.
I question the use of this fee arrangement to develop long-term relationships with clients.
Here, you charge for access to your service or products.
This option gives you flexibility to charge an appropriate amount for each customer or client.
Believe it or not, you can also charge your clients by taking an equity portion of their company.
This aligns your interest as a service provider and your client’s interest like you wouldn’t believe. There is potential for huge upside.
Of course, there is huge risk on the downside.
If you sell a service, get creative on how to price it. Some methods are better for generating larger profits than others. Some methods are also better at aligning your interests with those of your clients.
Finally, if you’re starting your own company and need expert help from service providers, such as lawyers and accountants, think about how they are pricing their services to you. Is there a way you can work with them to align both your interests?
(photo courtesy of: http://flic.kr/p/5BwUpL)