Agreeing to a fixed price for a service you provide could actually be harming your profits, according to a digital entrepreneur.
Speaking on the My Business Podcast, Mikel Lindsaar, founder of digital development firm reinteractive, says that sticking with an agreed-upon fixed price can cause problems.
“Traditionally with software development, quite often what you get is very cheap software development, or you'll get a fixed price quote,” says Mikel.
Having that fixed price favours the customer, he says.
“A fixed price quote is very attractive to a customer, because they can exactly budget what it is going to produce, and they think they're going to get a fixed set of features within a fixed time frame.
“I've dealt with more than 200 software projects in six years, and out of those, about probably 30 per cent had done it previously fixed price … and none of them were happy with the outcome.”
According to Mikel, in a fixed price agreement the focus is shifted away from the service provided, with the business instead constantly checking against the customer’s original requirements.
He suggests charging a rate for the time spent on the service, to allow the business to work freely to create the best possible result, "like a traditional professional services business".
Mikel also says it is important to a business’ bottom line to evaluate how commoditised its product is.
“If you have to put thought and a lot of time into selling that first product … then you need to charge for that,” he says.
“And if you don't charge for it, then you're setting yourself up to be on a treadmill of not making enough money to then be able to afford the support engineers to support the products that you've already sold.
“I think the key with that is to make sure that product you're selling is commoditised enough that there's [no extra work] … going into it.”
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