By Peter Lyle DeHaan, PhD
For the Telephone Answering Service industry there are likely as many pricing philosophies as there are companies to implement them. In general, however, all pricing schemes fall into one of two classes: flat-rate and measured-rate strategies. Historically, the industry started with the former. Over time, in the pursuit of objectivity and fairness, rates were made more reflective of the service rendered and the effort imparted to provide that rendering. It was this pursuit that caused a migration to more sophisticated flat-rate structures and ultimately measured-rate arrangements. (The pragmatic desire to increase revenue also played a significant role in this evolution). This general shift in pricing stratagems also follows and parallels the development of and improvements in the capabilities of systems to capture, report, and analyze statistical data.
Flat-rate pricing, as the name implies, produces bills that are at a fixed rate and which have no variable charges. There are, however, two variations of the flat-rate pricing approach. The first and earliest implementation is the simplest to quote, bill, explain, and understand. It is, quite simply, that every one pays exactly the same rate every billing cycle, regardless of their usage. For this approach no statistics are needed to calculate a bill and there are no variations on each invoice, save the client’s name and address. While logistically simple (and sometimes a necessity – due to equipment limitations or manpower restrictions) this approach is the most inequitable as everyone pays what is essentially the average usage of all clients. That is, half of the client base is subsidizing the other half who in turn are not paying their fair share. Also, while flat-rate pricing protects your revenue stream during times of low traffic, it leaves your expenses vulnerable during times of high traffic. This variation of flat-rate pricing is the universal flat-rate pricing approach.
The second iteration of flat-rate pricing is flexible flat-rate pricing. In this scenario each client is still charged a fixed rate each month with no variable charges. However, the amount of this fixed rate varies from client to client based on their historical patterns of need and usage. This approach is more equitable than the universal flat-rate discussed above since the charges are theoretically proportionate to usage. However, there are two situations in which this approach tends to be problematic. The first is what do you charge a new client? There is no track record on which to base the charges. Additionally, experience tells us that a client’s own estimate of usage will be grossly inaccurate. The second is, what happens when a client’s amount of usage deviates significantly from historical patterns? If their traffic increases ten-fold, you are no longer being adequately compensated for your work. Conversely, should their usage drop to a small fraction of the historic norm, the client will suddenly find themselves paying too much for what they are receiving. These problems with flexible flat-rate pricing, as well as the in equities of universal flat-rate pricing, can only be corrected by adopting a usage-sensitive billing strategy.
(An interesting enhancement to the flexible flat-rate pricing scheme is to implement something comparable to the Utility industry’s “equal payment plan” whereby you make flat-rate payments all year and at year’s end your account is reconciled with your actual consumption for the year. But this scenario is in actuality a measured-rate approach dressed in flat-rate clothing.)
As mentioned above, the other major type of pricing philosophy is measured-rate. Quite simply, each bill is a reflection of some measurement of how much was used. (Typical implementations have abase-rate which provides for a threshold of usage; additional usage appears as a variable charge in each invoice). Just as with the fixed-rate plans, there are also two versions of the measured-rate arrangements. The first is unit-sensitive and the second is time-sensitive. Both are the same in implementation, the only difference being their system of measurement. The perspective of unit-sensitive is a tally of the number of occurrences (the number of calls answered, messages taken, dial outs made, patches connected, etc.). Whereas the point of reference for the advocates of time-sensitive billing is a measurement of time spent doing billable activities (the time spent taking a message, giving out information, placing a call, patching a caller, etc.).
The unit-sensitive approach is a definite improvement over either flat-rate philosophy since answering more calls (doing more units of work) increases the variable charges and hence the total bill. The variable nature of this pricing scheme (if properly conceived) protects the answering service’s expenses during times when high staffing levels are required to appropriately service client needs. If the scheme has a base rate component, revenue is also protected during times of low call traffic.
The unit-sensitive approach to billing is significantly more equitable to clients than the universal flat-rate approach discussed earlier since the greater the usage the greater the charges. It is also an improvement over the flexible fixed-rate philosophy as it corrects the two weaknesses stated previously when dealing with new clients with no track record and clients whose usage makes an unexpected change. Even so, unit-sensitive billing is not with out limitations. Its chief shortcoming is the realization that not all calls are equal. Some calls (or messages) last only a few seconds, while others can continue for several minutes. Yet in a unit-sensitive approach, both will be billed exactly the same amount– one at a profit and the other at a loss. While initial attempts at computer automation for the industry produced equipment only capable of supporting the most basic form of unit-sensitive billing, later improvements tracked the time spent on these activities as well. This technological development paved the way for the most equitable billing approach: time-sensitive.
Time-sensitive billing is the most adept at protecting an answering services’ expenses during times of heavy usage. Your staff is paid by the hour (time); if you bill your clients also based on time (so much per minute or hour), simply insure that the rate billed to your clients covers the rate paid to your staff (taking into account idle time and burden) and your expenses are covered. From a client stand point time-sensitive billing is the most objective (but not always the most accepted), as they only pay for what they use and don’t have to worry about subsidizing other clients.
Both measured-rate plans (the unit-sensitive and the time-sensitive approaches) can be expanded to offer a pricing tier of various combinations of base-rate, included service, and rate per additional element. These different options, if properly developed, will all be profitable to the answering service, however, each will have a specific appeal to a particular client based on their anticipated usage, seasonal fluctuations, and tolerance for the unexpected (that is, high variable charges).
By way of analogy, consider applying these pricing philosophies to selling gasoline:
The universal flat-rate approach would result in the following price posted at the station: “Gas, $50 a month.”
The flexible flat-rate approach would say: “Gas, starting at $50 a month.” (But since you use more gas than the average person, your rate for gas is $75 a month).
Similarly unrealistic would be the unit-sensitive implementation. In this case the sign would read: “Gas $10 per fill-up.”
Finally, we have the time-sensitive example (or more correctly, the “gallon-sensitive” example): “Gas 98 cents a gallon.”
If these first three examples strike you as impractical, unfair, and inequitable, than the point of this article has been made. Clearly, it is only through the last example that a reasonable, practical business can be operated.
In the real world, examples of a universal flat-rate are hard to identify. But an example of flexible flat-rate pricing might be trash removal. It is generally billed at a fixed-rate, regardless of how full or empty the container is. The amount of the fixed-rate, however, depends on the size of the container you selected.
An example of unit-sensitive pricing is the cost to mail a first class letter in the United States; it is 32 cents regardless of where its destination or the amount of effort required for delivery.
For time-sensitive billing, examples abound. Cellular air-time comes to mind as does sitting in your attorney’s office.
Analogies also exist in the telecommunications field. Basic phone service, which once was and in many cases still is billed at a fixed rate, is an example of universal fixed-rate. When telcos realized that businesses use a disproportionate amount of phone service when compared to residences, flexible fixed-rate kicked in, with businesses paying a higher rate than residences for monthly service. Next in the progression, but which is not yet implemented in all areas, is measured rate service, where local calls are billed at a unit-sensitive basis. For some locations, the trend in local calling is moving towards time-sensitive billing, which as earlier discussed is the most equitable approach. Long distance has always been billed in a time-sensitive manner.
With an implementation of a time-sensitive billing philosophy, it appears that our billing is the most equitable, progressive, and enlightened as it can be. Does this mean that no further pricing enhancements are to be expected? Hardly.
The future may hold many options. One possibility is market-based pricing as opposed to cost-based pricing (which is the basis for all of the above pricing schemes). This will require that we take our sales and marketing to a higher level. Positioning ourselves as out sourcing experts of telephone services might be the first step to reaching a market-based pricing strategy.
Another, less esoteric option would be to further fine-tune the time-sensitive approach. One possibility (though certainly not advocated by this author) can be anticipated by looking at the long distance market. When switched 800 service first became available, it cost $125 a month, plus installation, plus usage. Over time the monthly cost, as well as the installation cost, have decreased. Today, you can generally obtain switched 800 service where you only pay for usage and have no install or monthly fees. The implication is that a similar transformation could happen in the Answering Service Industry. However, before we rush to boldly embrace this philosophy, let us remind ourselves that without a base rate, we lose all revenue protection during times of low traffic.
Lastly, a value-based approach could be used. As we automate, streamline and upgrade (to intelligent systems), we will find ourselves doing things faster, better, and more efficiently. Therefore, billing by time produces less and less revenue. May be through technology, we can reduce a 60 second activity down to a 30 second activity. Do we then bill on time for 30 seconds of work or do will we bill on value for 60 seconds of results?
In conclusion, we have discussed the elements of major pricing philosophies in our industry, exposing their limitations, and in some cases, the foolish and out-dated reasoning. Only the time-sensitive approach stands beyond reproach, offering fairness, equity, and pragmatism for both provider and client.
Peter Lyle DeHaan, PhD, is the publisher and editor-in-chief of Connections Magazine. He’s a passionate wordsmith whose goal is to change the world one word at a time. Read more of his articles at PeterDeHaanPublishing.com.
[From Connection Magazine, March 1995]