Supplement: Professional Services Business Models
Pricing Models for Professional Services
A pricing model (also called a revenue model) is how an organization captures some value back in exchange for the value it creates for customers. The most common pricing model is “retail pricing,” used for most consumer packaged goods and retail services such as restaurants. In this model, a fixed price for a specific type or version of a product or service offered is posted for the buyer. The type or version of the product or service is identified by some sort of code, such as a stock-keeping unit (SKU) code. A subscription, a regular fee for a particular period of use, is also a standard pricing model for consumer services.
For professional services, there are four typical pricing models:
- Time and materials: a percentage is added to a per-hour charge for the professionals doing the services and to materials used to deliver services. For example, a lawyer may charge $300/hour to draft legal documents, plus actual expenses for overnighting documents to you. Medical services also are typically billed this way.
- Brokerage fee: the professional service provider charges a percentage of an asset or an expense they are working on behalf of their customer. For example, a real estate agent charges a fixed rate on the sale price of a house. Marketing agencies do the work to place advertising for their clients in exchange for a percentage of the advertising budget.
- Fixed price: the service provider quotes a fixed price for a specific scope of work. The professional service provider takes the risk if it takes them longer than expected to do the work and reaps the reward for efficiency. For example, a lawyer may charge $1000 for drafting documents required for a seller to close on the sale of a house. This model is similar to a retail pricing model, except that each scope of work may be uniquely customized.
- Retainer: this is like a “subscription” to a professional service provider– the professional quotes a fixed price for being available to do a specific scope of work each month, whether or not the customer uses it that month. For example, a lawyer may charge $1000/month to be available for up to 40 hours of work, with unused hours rolling over a certain number of months. For customers, this provides a predictable expense, smoothing out costs from month to month, and also assures access when it is needed for unexpected reasons. Retainers typically cost less on a per-hour basis than a time-and-materials project.
These models can also be combined and often are. For example, retainers and fixed price models can be connected to involve a specific scope of work done every month, plus a little extra for unexpected things.
Comprehension Questions
- Can you explain the four pricing models that professional service companies might choose to price their services?