Criteria for How to Bill for Services
When billing for services, a principle should be adopted that is simple, unambiguous, complete, fair, sustainable and strategic. These criteria apply equally to the provision of business services and technical services. This posting is intended to help service managers whose services are not easily billed on a transaction by transaction basis.
Simplicity implies two facets to billing:
- the principle should be conceptually simple. All the stakeholders should understand how they will be billed
- it should be simple to calculate the bill for services. The cost of billing is pure overhead and should be kept as low as possible. A complicated billing principle may imply complex and costly means for calculating the bill.
When a billing scheme is not simple, I have seen errors in budgeting, both on the customer and on the supplier side, as well as issues of license violation due to the difficulties in correctly calculating the service prices.
I have also seen a case where fairness would have dictated billing for a messaging system on the basis of who was sending and who was receiving messages. Although the concept was very simple, the cost of measuringuse, not to mention the potential impact on performance, made this principle unfeasible.
Whatever the principle, the events the lead to the calculation of the bill should be interpretable in only one way. In general, ambiguity is a corollary to complexity.
The principle should account for 100% of the services being delivered. This means that not only should everything be accounted for; it also means that everything should be billed only once.
Completeness does not mean that everyone pays the same price. For example, the service provider might have a policy to perform certain service pro bono. The pro bono customers should be reported in the pricing and revenue calculations, even though the rate for the service might be 0.
Completeness is one of those rules where the Pareto principle does not apply. You would not think of billing only the top 20% of your customers!
The perception by the customers that the billing is fair is of utmost importance. It means that there is some clear relationship between the value of the service delivered and the price asked for the service.
Suppose you are an internal service provider charging for a service by department. Each department in your organization pays the same amount. While this principle is simple, it is likely to be very unfair. There are usually large differences in the size of a department or in the use a department makes of a specific service.
Suppose you are an external service provider charging very different prices in different countries for the same service. There might be some differences in costs that justify different prices and economic libertarians might adjust the price to whatever the market can bear. But there are numerous cases where gross price differences have led to market distortion, especially when multi-national customers buy wherever the service is cheapest.
When it comes to fairness, the operative word is perception. There are no fixed rules for determining what is fair or unfair. Fairness is like pornography. It might be very difficult to define, but you know it when you see it.
The price you charge for your service is sustainable if it generates sufficient business to gain sufficient revenue to maintain your business activity. In the simplest case, this means that the price must cover the costs, at least. In a profit making enterprise, there should be a margin to cover both the profit expected by the owners, as well as to constitute reserves for managing risk and to fund, in part, business transformation. Of course, many organizations will not fund business transformation out of their own cash reserves, preferring to raise new capital or to borrow funds from banks or from bond-holders.
In more sophisticated cases, a service provider will consider the costs and revenues for an entire product line, rather than treating each product separately. They might be willing to sustain losses for one service because the delivery of that service also enables other services. The entire notion of free Internet services and free publications is based on this principle. A service provider is happy to have a large number of customers that do not pay for the services, because that large customer base enables to the service provider to charge for advertising or to resell information about the customers.
Ideally, a price should encourage the evolution of a market in a direction desired by a specific strategy. These strategies may take many forms.
You may wish to increase market share or encourage the use of a service by lowering its price. With a lower price, but with higher use, overall revenues may increase, thereby funding improvements in the service. The customers would also be happy, getting better service at a lower price.
Price may also be used as an incentive to manage capacity requirements, offering lower prices for off-peak periods.
The time-honored concept of the loss leader encourages gaining customers in the hope of selling to them other, higher margin, services.
I have also seen the case of a service provider wanting to phase out a service but not wishing to send a negative message to long-time customers that have been happy with the service and see no reason to stop using it. Raising the price of that service is a strong incentive to encourage customers to migrate to another service—albeit with the risk of sending those customers to other suppliers.
Measuring your Pricing System
If you charge for your services, then you will surely want to measure how effective your pricing is relative to your business goals and strategies. The following table gives some metrics according to each of the billing criteria discussed above:
|Criterion||How to measure|
|Simple||Cost of the billing system; Number of billing inquiries|
|Unambiguous||Number of billing errors|
|Complete||Work orders for implementing a service that cannot be related to any bills|
|Fair||Customer complaints; periodic customer reviews|
|Sustainable||Business line profitability; Market share|
|Strategic||Measurement of return on investment|