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. 

Business Models in Use

Flat Rate is Old School

Before we wired the world the flat rate model was developed to encourage frequency of use. The early telegraph and the 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. 

 

Flat Rate Evaluator

Valuable to Customer

Benefits

Challenges

Key Performance Indicators

Valuable to Business Offering Flat Rate

Benefits

Challenges

Key Performance Indicators

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.

Challenge 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 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 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.

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 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.

Free + Membership vs. Flat Rate

Amazon has recently overtaken the USPS in package delivery, and has frame customer expectations to expect “free” shipping for people who pay for it Amazon Prime service. Note that flat rate may seem affordable until you are competing with free. 

Key Flat Rate Mechanisms to Test

KPIs depend on your unique business attributes and business model combinations. However there are heuristics when investors evaluate a flat rate model. 

Mechanism to testMetrics to measure
Customers make the sales decision faster because pricing is transparentSpeed of conversion from interest to close
Profitability  Per service gross margin and net margin
ScalabilityWhat margin efficiencies are gained when sales volume increases
UtilizationWhat percentage of available capacity is utilized in any given time period

Before You Consider Flat Rate

  • Can you predict the time and effort to deliver a product or service. 
  • Research competitive pricing alternatives: does flat rate give you an edge?

Testing the Model

  • Are customers buying more because of the flat rate offering?
  • 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

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)