Flat Rate Business Model

Customers hate surprises! One way to alleviate their fears is to charge based on a flat rate business model – charging for a fixed fee rather than charging by the hour. The flat rate model is popular with legal services, creative services, building contracting, and other services companies. Also, postal services, public transportation, some airlines, and certain healthcare services are offered at flat rate fees.


How the Flat Rate Business Model Can Benefit Customers:

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.

Easy to Compare

Customers are able to compare services in an industry in which price signals value.

How Flat Rate Can Benefit the Company Running the Business Model:

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.

Company Challenges in Managing a 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 original 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 their recipe for a repeatable process, they 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 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.

The business model mechanisms to test:

Mechanism to test Metrics to measure
Customers make the sales decision faster because pricing is transparent Speed of conversion from interest to close
Profitability   Per service gross margin and net margin
Scalability What margin efficiencies are gained when sales volume increases
Utilization What {4b0c188ae8604bf014d8bc27c7c65bbf455b55139b6ec077c9ec57d60479b1a7} of available capacity is utilized in any given time period

Emerging Trends:

Flat Fee as a Disruption to Commission Based Models

Startups aiming to disrupt high commission business models like payments or and 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.

Deeper Dives on the Flat Fee Model

A Scrappy Real Estate Broker Stakes Her Business on Flat Fees, by Colleen DeBaise, The New York Times, 2014.

All-You-Can-Fly: The World’s Going Flat-Fee… So Why Not Airlines? By Miquel Ross, CNN, 2016

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

Creating Value Through Business Model Innovation, Raphael Amit, Christoph Zott, MIT Sloan Management Review, 2012. (paywall)

What do you think about the Flat Rate model? Do you work in a company that has tried this approach? Do you have other resources or company suggestions we should source? Share your comments or suggest another business model to add to our library.

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