Flat Rate Business Model
The Flat Rate business model is for customers that hate surprises. A way to alleviate their fears is to charge a fixed fee rather than charging by the hour.
Flat Rate is about Frequency
Before we wired the world the flat rate model was developed to encourage frequency of use. The early telegraph and postal services were built on this model: one flat rate that is standardized.
Flat rates helped accelerate adoption. You didn’t have to think heavily about the cost of sending an envelope across a country like the US: it was standard, and likely subsidized.
Some law firms and consulting firms also use flat rate pricing in order to compete with the industry standard: charging an hourly fee or retainer service. Instead, services are packaged into a standard flat fee.
Some SaaS companies have started to offer flat rate offerings without tiers to differentiate from perpetual subscription tiers favored by most of the sector.
Flat Rate Evaluator
Valuable to Customer
Benefits
- No surprises - all-inclusive price
- Easy to compare
Challenges
- May not see value in flat rate pricing preferring more customized approaches
Key Performance Indicators
- The total cost of flat rate relative to alternative options
Valuable to Business
Benefits
- Shorter sales cycle from transparent pricing
- Packaged services are easier to manage
Challenges
- Flat rate shipping is now costly compared to Amazon Prime or other free offers
- Flat rate services fees for lawyers, designers, and realtors are hard when clients are demanding
Key Performance Indicators
- Gross margin
- Response time
When it Works Well
Costs Transparent to the Customer
Customers appreciate knowing the fully-loaded cost upfront and may be more willing to convert to becoming a customer. There are no hidden fees or surprises in a flat rate pricing structure.
High productivity service
A flat rate that is market competitive works well when the team delivering the service is highly efficient.
Say a design shop charges a flat fee of $2000 for an illustration. If that design team can accomplish the illustration with a junior team (1 Designer, 1 Art Director), working only 10 hours for a blended hourly cost of $40, the small services firm makes a decent margin ($2000 – ($40 x 10 hours), or a margin of $1600).
Highly repeatable and predictable service
Based on the above example, one can imagine that flat rate pricing works best when the process for performing the work is repeatable and predictable. In the case of the design shop, the founding partners might have developed a client screener and questionnaire to ensure a smooth process, for example.
Bus vs. Taxi Service Delivery
The “Bus” delivery model is a concept that describes how to achieve scale. Customers are trained to follow a published schedule and arrange their day to meet that schedule. Taxis provide more customized service and door-to-door delivery and charge different fees to deliver additional value.
Challenges to the Flat Rate Model
High Variability in Customer Expectations
Flat rate fees are problematic if processes and customer demands are hard to control. Building contractor firms are famous for this struggle, especially when customers make demands above and beyond the originally defined scope of the project. If flat rate companies fail to manage client expectations, they may struggle to collect payment or may overdeliver and make little profit.
Highly Unpredictable Usage of Service
If a services firm has not figured out its recipe for a repeatable process, it may have a highly variable investment in time, activities, and resources to deliver the outcome. Margins may suffer until the company standardizes workflow and efficiency.
In transportation services, highly unpredictable usage may result in a misalignment between fixed costs and variable revenue.
May Encourage Customers to Fish at the Bottom
Because it’s so easy to find pricing information via a quick google search, customers can easily search for the lowest rate possible. In certain industries, the race to the lowest price places pricing pressure on all firms to lower their rates as well.
Hard to Keep Customers Happy with One-Size Fits All Approach
Customers have gotten used to business models designed around their specific needs and maturity curves, particularly enterprise customers. Flat rate mono-model companies may be losing market share to competitors who bend and stretch to fit their customers’ buying preferences.
Trends in the Flat Rate Model
Flat Fee as a Disruption to Commission-Based Models
Startups aiming to disrupt high commission business models like payments or real estate may choose a flat rate fee as an aggressive pricing alternative.
Flat Fee Alternative to Professional Services
Similarly, many service professionals have introduced flat fee pricing to force more standardization in their business and focus their energies on repeatable predictable services. Legal firms, general contractors, and design firms have experimented with this model vs. the bill-by-the-hour professional services model.
Free + Membership vs. Flat Rate
Amazon has recently overtaken the USPS in package delivery and has framed customer expectations to expect “free” shipping for people who pay for it Amazon Prime service. Note that a flat rate may seem affordable until you are competing with free.
Before You Consider Flat Rate
- Can you predict the time and effort to deliver a product or service?
- Research competitive pricing alternatives: does a flat rate give you an edge?
Testing the Model
- Are customers buying more because of the flat rate offer?
- Do you leave money on the table: time and materials or other ways of charging that customers would have been happy to pay?
More on FlatRate
What Is A Flat Rate Pricing Model? Pros & Cons Explained, by Patrick Campbell, Profitwell, 2020.
A Scrappy Real Estate Broker Stakes Her Business on Flat Fees, by Colleen DeBaise, The New York Times, 2014.
5 Reasons the Flat Fee Billing Structure Works, by Stacey Leeke, Thomson Reuters, 2016
Pricing Strategies for a Value-Driven Industry, by Emily Ruth Cohen, AIGA, 2009
The Flat Fee Revolution: Is Billing Time a Dying Business Model? by Jacqueline Jubb, Thomson Reuters
How to Turn a Service Business Into a Product Business, by John Warrillow, Inc.com, 2010
