We are in the midst of a multi-part discussion about how service firms bill for their services. Between hourly, retainer and project fees, there are a lot of ways that service firms bill for their work. We are looking at each method, its strengths and weaknesses, and also some alternatives.

There are three methods that I’ve seen clients use and each has their advantages and disadvantages: Charging for time (e.g. the “billable hour”), charging for production (project fees or monthly retainers) and pay for performance. Today we’ll look in detail at pay for performance.

Charging for results
Clients love pay-for-performance, and if you can implement it it will make your sales process so much easier. You get to tell the customer that they only have to pay when they have made money, how easy is that? But in most professional-service businesses, there is still a HUGE gap between idea and execution. Where the client can turn your valuable idea into clay and you both end up with nothing. For this reason, it’s been difficult to adopt pure pay-for-performance mechanisms in most industries. But there are a few ways it’s being used that are worth a look.

1. Fixed project fee, with guaranteed results. In this case, the service firm will continue working until results are achieved. This provides certainty for the client, and upside if the results area achieved quickly.
2. Fixed fee (or monthly retainer) with a bonus or increased rate depending on achieving certain goals. One firm that has tried this gets paid a “bonus” on about 25% of their jobs; not bad.
3. A “tip” system, where you and the client agree to a price, but you add a “tip” to the invoice that they can pay or not pay according to their perception of the value they received. (Skeptical? Check out this restaurant that works on a similar premise)

When there are very tangible outcomes to achieve, pay-for-performance works well. Investment bankers charge huge success fees when they sell a client’s business. Recruiters often are paid only upon a successful hire. So there are places where this payment mechanism can really work.

Maybe your work doesn’t have such a tangible outcome, how can you tie results to fees? Are there baby steps you could take?

1. Ask for a “bonus” payment if a project is completed by a certain date. Or extra payments if work extends beyond the budgeted timeframe (due to delays on the client side, of course).
2. Think like an athlete. Sometimes athletes get bonuses if their work wins an award, or they have a record-breaking year. Could you ask clients for bonuses in those circumstances?
3. Could you measure client “satisfaction” or the end user’s perception of the value of your work and get some kind of escalated fees based on the results?

Some of these may seem far-fetched, but the only way to know if your client would accept them is to try them out. Brainstorm with your team to see how you might capture a little more value and then experiment with some of those ideas. You might be surprised at the results.

Have you tried any alternative mechanisms for capturing value? What’s worked, and what hasn’t?

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Brad Farris is a small business advisor with Anchor Advisors, Ltd. in Chicago, Il. Since 2001 Anchor Advisors has been helping creative professional firms to grow, by helping them clarify their purpose, get the most from their people, keep their eye on key performance measures, and implement consistent processes. Brad is also the author of The Business Owner’s Champion: 6 Practices to Build your Nerve and your Business.