Fixed Price, Time and Materials, or Recurring Revenue: The Great Debate
In 2007, at the depths of struggling to make ends meet, my business partner sat down with me and presented a slide deck titled:
“Obtaining peace of mind.”
The basis of the presentation was, at the time, that we had little to no recurring revenue on our books. 97% of our business was driven in the form of fixed-price project fees. And 3% was in the form of recurring hosting subscriptions.
The presentation outlined a plan to achieve 50% of our revenue through recurring methods by the end of the year. Our goal was to make enough through recurring billing to cover our base salaries and overhead.
So we set out on a quest. To move our 3% needle to 50%.
But why would the form revenue comes in be more or less attractive to us? Is a certain kind of revenue better than another?
The Three Types of Service Revenue
A big trend in entrepreneurship right now is innovation around business models. Getting paid though a straight, single transaction is no longer fun. People are working on methods to innovate renting, sharing, subscribing, micro-paymenting, loaning, and purchasing.
But in the world of service, things continue to stay pretty vanilla. Here are the three prevalent ways to bill if you have a web service company:
I’m going to build X and you are going to pay me Y. Typically you’ll lay down some kind of deposit of (.5)X with a crumb half way through (.25)X and then close out the project with a final payment of (.25)X. Just because something is fixed-price doesn’t mean it is going to be cheap. You can charge someone a million dollars just as easily as a thousand dollars. I’ve never done it, but know people that do. I think fixed price billing is probably the most common billing method as a web professional. It’s easier to sell. Your clients know exactly what they are getting into. I find that Fixed-price is fantastic for large up front projects like revamping someone’s website or doing a major brand overhaul. It’s terrible for something like “getting you to #1 in Google.”
Time & Materials
Or popularly referenced T & M. This is when you get to bill for your time. You might provide a client an estimate like, “I think this project is going to take me X hours,” but in the end you are just going to bill for the time you actually worked. Getting clients to pay for your time can be fantastic for you, the pro, because you are getting compensated for each and every hour, no matter what. You are forgoing the potential profit opportunity that exists with fixed-price where you can do value based selling and charge a whole lot more than the time it will take. But hey, there’s also a hell of a lot less risk. I’ve found that T & M can be a lot harder of a pitch. Clients like to know what they are getting into. The other day I asked my lawyer to draft up some contracts. I asked him how much it was going to cost, he said, “oh, it will be totally reasonable, don’t worry.” I got a bill for $3,000 a couple weeks later. Not sure if that’s reasonable or not, but I couldn’t do anything about it. In my agency, I used T & M for support requests that were under five hours and we always gave estimates before beginning work. This allowed us to remove the overhead of formal quoting while facilitating support for our clients.
Ah yes, the elusive monthly, quarterly, or yearly automated billing. I say elusive because I talk to many web professionals that are thinking the same thought I was having back in 2007…yeah, I want that! And many entrepreneurs do. Some of the most valuable businesses in our world today are the one’s that have figured out a way to deliver a constant stream of value and get paid monthly for it. Adobe recently completely changed their entire business model to pursue that of a continuous revenue stream vs shrink wrapped software. Most major players, Apple, Microsoft, Amazon, and Google all have some kind of product that delivers constant value in exchange for a monthly subscription. The surprising thing in web is that our industry has a built framework for delivering a monthly product (hosting) and many of us still lack a solid stream. By the time I sold my agency, I had built up my recurring net profit close to a hundred thousand a year. While it wasn’t even close to fifty percent of my revenue like I set out to do, it added up to a lot less stress.
Six to One, Half Dozen The Other
After running HotPress for over a decade, I came down to this system:
- Up front projects, builds, and anything over five hour build would go fixed price with a scope of work
- Ongoing support for projects and requests under five hours would be billed through T & M
- Hosting is billed via recurring
- Support can be billed via recurring if the client wants on-demand phone support or a dedicated amount of hours at a discount per month
- Marketing (SEO, SEM, PPC, Email, etc) are best delivered through a recurring retainer
Now, just because that is how I like to go, doesn’t mean it’s the only way. I was just talking to my friend Jon Hinshaw the other day and he prefers to run his projects through a recurring retainer. Instead of charging $10,000 up front for a project, he would rather get paid $3,000 per month, invest a huge stint up front and then let the recurring revenue flow.
I was talking to Anthony Franco the other day and he is all about time and materials. Doesn’t bother with recurring or fixed priced quotes.
So while I was all about a blended approach to our revenue, some people like to focus in on a single mode of delivery and be done with it. There is probably some truth to the fact that clients like to understand how they are going to be billed as a key decision factor in their relationship with you. On a couple of occasions I got turned down for new business because we pushed recurring so hard.
Oh well, it was worth the peace of mind.
Let’s turn the conversation to you. How are you billing for your services right now? Have you innovated on any of the above or found that one method when positioned a certain way works better or worse than any other? I want to know.
Leave a comment below and continue the conversation.