Managing profitability & choose the right billing method
We’ve talked before in previous posts about managing profitability through the continuous management of time, cost, scope & stakeholders. However another way to manage profitability, and particularly your cash flow is to select the right billing method for your agency – and your client.
7 common billing methods
- Three phase : Scope up front, Production 50% production 50% at the end
- Top and Tail: 50/50 Start & Finish
- Pre bill: Requires payment up front
- Post bill: Requires payment at the end
- Retainer: agreed fixed amount per month for services
- Monthly accrued: tally the percentage completed at the end of each month
- Time & Materials: bill at the end of each month based on head hours
(Source: Steve Fanale from the Strategic Account Management workshop)
The first 6 methods are all examples of fixed price approaches.
Is there a best option? For an agency, time and materials is an attractive option as it means billing on actual head hours. “Time and materials is the best way to grow the business”, says Steve Fanale of AppVillage. It’s hard to sell to clients, although government clients are more comfortable with this approach. T&M provides clarity – there is no need to include a buffer or contingency, there’s no wastage.
Generally clients prefer retainer method, as it gives some certainty to their budget each month.
What is more difficult is dealing with scope creep, and how you charge (or not charge, but should) for changes. We’ll deal with that issue in a future post.
Another billing method is the use of value pricing or performance pricing. Value pricing gives the agency/developer an opportunity to benefit from adding significant value to the client. Often the agency will charge a small retainer to cover costs, so there is some sharing of risk. For it to work, the the values of the agency and the client are in complete alignment.
Digital agency Tectonic has a couple of clients on a performance basis, where they are remunerated on a percentage of sales. Richard de Nys, Tectonic Founder & Production Director says, “In principle it works well as the upside is good. In practice these projects can be pushed to the bottom of the pile behind clients who pay immediately, when there’s a lot of work on.”
“We consider it on a case by case basis.” Currently they are working with a publisher on ad sales, and other client is measured on product sales.
This model is also common in apps development or in dealing with telcos with revenue sharing basis.
Surface Digital wrote an interesting post earlier on Beyond fixed price, fixed scope
Or attend the MBA in a Day one-day workshop – 26 February 2013 in Sydney, and 28 February in Melbourne. Send an email to claudia – at – digital-nation.com.au to receive the advance notice.