Fixed-price billing is anything but a compromise — quite the opposite?
Some time ago we asked ourselves: "How do you tell the difference between an offer that is 'more expensive' and one that is 'too expensive'?" And we reached the conclusion that a savvy buyer should not rush headlong towards the lowest prices, but rather look for the added value behind a higher price. A similar question must now be addressed when choosing between fixed-price billing and hourly-rate billing.
The search for the right price in detail
All shops are required to display the price of the goods they sell by weight or by unit. In the same way, a service company is virtually obliged to display its hourly rate. This is a reliable way of reassuring new clients by giving them the ability to compare against market prices — ensuring total transparency. Just as one knows the price of a baguette or the cost per square metre of property, one can find out a taxi driver's hourly rate for a given zone, for example.
Companies that bill their services this way provide many reassurances to clients, who feel they have full control over the service. If the taxi meter climbs above the amount they had budgeted, they can ask the driver to drop them off and walk the rest of the way. An ideal arrangement, enabling a "stop and go" approach. This pricing model offers qualities that can be summarised in three points: transparency, comparability, and flexibility.
The fully reassured client knows exactly where they stand, but they nonetheless face the risk of budget overruns: they do not know in advance whether they have enough money to complete their project, or whether it might end up costing more than anticipated. While a budget estimate based on an hourly rate may seem like a good deal before the work begins, the client is never fully protected from a billing surprise and has no way of guarding against an overrun. Flexibility comes at the price of uncertainty over the final total. By contrast, a fixed-price offer is less flexible but provides reassurance through the advance definition of a task for a set amount.
Taking the risk of fixed pricing can pay off handsomely — for both client and provider
Whether for the service provider or the client, choosing fixed-price billing is a form of risk-taking in that it is a one-shot arrangement. Both sides must be confident: that the fixed price covers the entire scope of the service and that nothing has been overlooked. This is where experience and expertise come into play to underwrite a given price for the requested service.
For a company, calculating a fixed price is very difficult, as the account manager responsible must not overlook a single detail — and this can take more time than simply applying an hourly rate. For an engineering firm, the risk is even greater, given the number of stages and subcontractors involved between a feasibility study and full industrialisation. The calculation must account for everything: risk management, quality control, and timelines. For the client too, the fixed price can prove to be a good deal, as they receive a turnkey service. Certainly, they must trust that they will get their money's worth while accepting a degree of uncertainty — but they can always research the reputation of the company they are dealing with, rather than discovering after the fact, as in the parable of the old man and the hammer below, why they are paying what they are paying.
In this fable, an old man is called to a factory where several experts have failed to repair the main machine. They decide to call in a veteran repairman who walks around it, taps a few spots, takes a hammer from his toolbox, and strikes a precise point firmly — fixing the machine. He then sends an invoice for CHF 5,000. The accountant requests an itemised bill. The old man's response:
- The hammer blow = CHF 2
- Knowing where to strike = CHF 4,998
That says it all: while the hourly rate suits highly competitive activities where comparison is important, fixed-price billing is better suited to high-value-added activities where part of the cost goes beyond the mere measurement of time and also encompasses the provider's exceptional expertise and excellence — not to say talent — reflecting a level of mastery that allows them to refuse to reduce their service to an hourly cost.
Companies that work on a fixed-price basis take on a heavy commitment — because if they miscalculate, they will lose the client forever, whereas if the client feels they got their money's worth, they will keep them for good. A lack of flexibility that can be well worth it.
Choosing fixed pricing means placing the client at the centre (with an obligation to deliver results) while also demonstrating the expertise and confidence the provider has in their own skills. Service providers who bill on a fixed-price basis therefore take on a greater share of the risk — entirely to the client's benefit.
