Service business models

You already know the revenue opportunity that exists when you grow a service business. Output in the US service sector is projected to increase 5.4 percent per year, to nearly $2.3 trillion in 2018, up from about $1.2 trillion in 2008. There is no faster way to start making money today than providing services.

A service business model describes exactly how you create and deliver value to your clients by offering a service for your target audience. A service business can offer any type of B2C or B2B service from wedding photography to large software development projects.

In this article, our focus will be on what types of revenue models or income models you can use in your service business to help grow your revenue to six figures and beyond.

5 service business models

There are five service business models:

  1. The hourly model – get paid by the hour
  2. The retainer model – offer packages of hours
  3. The monthly model – receive a monthly fee
  4. The performance model – your rate depends on results
  5. The project model – work per project or deliverable

Service business models

Sometimes a service business may operate under just one revenue model. Sometimes it may offer a mixture of different options. Choosing the right service business model can make or break your way to success.

But before talking about how to choose the right service business model, let’s briefly describe what each of these models is all about. A major difference among all of them is how revenue is generated. So, let’s break it down.

1. The hourly business model

The hourly model is pretty much self-explanatory. Your income is generated when you charge clients an hourly rate for the service you provide. A lot of service businesses charge their clients by the hour when there’s a low work volume monthly.

The hourly business model is not easy to scale without increasing your fixed costs as well. On top of that, it’s possible that you reach capacity soon. For instance, if you a health coach there’s a limit to the number of clients you can serve each week. If you have a consulting business, you’d need to hire an additional consultant as your business grows.

Another problem with the hourly rate is that you need to track the exact amount of hours worked before you bill your client. But sometimes the client might expect to pay less or be unable to see how time-consuming a task is.

Also, the speed of completing tasks depends, among other factors, on the service provider experience levels. So, a junior designer might need three hours to design one log concept while an expert designer can do it in less than an hour. In most cases though, the hourly rate will reflect your experience levels.

Pros (+)

  • Flexibility
  • Applicable to most service businesses
  • Popular
  • Best way for a new client to get to know you

Cons (-)

  • Difficult to scale
  • You need to track time
  • Sometimes, you need to demonstrate the value
  • You work first, get paid after

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2. The retainer model

The retainer model is when you sign a contract for a certain package of hours. Then, when the hours run out you bill your client for another package of hours. When a client hires you on retainer it’s like they top-up their account with credits.

The retainer model, similar to the hourly model, can work for nearly any service provider who charges an hourly rate and provides an ongoing service.

A major difference between the two models is that with the hourly model you invoice the client after you’ve done the work, while with the retainer model you get paid in advance for a package of hours.

The retainer model is time-bound instead of value based. You get paid for the time you devote to your client. It’s also limited because there are only so many hours in a day.

As with the hourly model, you need to track billable hours and display the result of your work. But it’s better than the hourly model in the sense that you have already sold part of your total work capacity so you can now focus on acquiring clients to fill up your schedule.

Pros (+)

  • Applicable to most service businesses
  • Predictable income (to a certain degree)
  • Good option for ongoing services
  • Better value than the hourly pricing

Cons (-)

  • Limited scalability
  • Like with the hourly model, you need to track time, and
  • Need to demonstrate the value, sometimes

3. The monthly model

Business model for agenciesThe monthly model involves charging clients a monthly rate for ongoing work. Accountants or SEO experts frequently work on a monthly basis. This type of income formula is best when repeatable tasks need to be done every month, e.g. creating backlinks and doing on-page SEO for a particular keyword.

Service businesses, like career coaches or consultants, or practically any kind of service provider can help clients for a monthly fee when a relatively big volume of work is done again and again.

The monthly model is a good model for most services businesses. The benefits are that both parties, the freelancer and the client, know exactly what to expect in terms of invoice value and deliverables. It also helps the client to get into a habit mode and get used to paying you every month.

Now, for your business as well the monthly model can be one of the best options because it allows you to estimate your monthly income as accurately as possible. It’s like having paying subscribers. With that in mind, it’s easier to manage your cash flow and strategize on what you need to do to grow your service business even faster. In other words, the monthly model creates a safety net for you. You know that no matter what, you’ll be paid at least an X amount of money.

The monthly model is also perfect for companies that sell software in addition to services. For example, a design and development company might work with a client for website updates but also offer them a monthly subscription to a server or an email marketing platform.

Pros (+)

  • Suitable for any kind of service provider, basically
  • Best for ongoing work
  • Best for steady streams of income
  • Builds up trust and sense of security
  • Can work together with other service business models

Cons (-)

  • There are not any top-of-mind arguments against it

4. The performance-based revenue model

The performance model involves agreeing with your client on a certain fee structure or percentage according to the results you get them. So, you either bill them based on a scale of dollar fees or commission percentages.

Let’s assume you’re a PPC advertiser running Facebook ads for a client. With the performance model, your compensation will vary depending on the revenue you generate for your client through those ads.

The performance model can work for lead generation experts, SEO professionals, debt collectors and direct sales businesses.

The performance model can be tricky, and you must be really careful if you want to work on a commission instead of charging a flat or an hourly rate for your service. With this model, the freelancer takes some risk because of a couple of reasons.

First, you need to wait for results – and results take time. So, you write sales copy for a landing page and your fees are calculated as a percentage of sales. But they sales cycle for that particular company might be three months.

Second, you’re not in control of other factors that affect the results. Using the same example, the revenue generated from a sales page depends on several different factors. One major factor is the level of incoming traffic. So, if your client runs short on budget, they could pause paid advertising channels. This will result in you receiving a much lower compensation. Unless of course you’re an insurance or real estate agent or an affiliate marketer, in which case you’re actually doing direct sales.

Third, your client business might not be optimized for results in other areas unrelated to your service. For example, the landing page designer might not have done good work or the loading speed of the page might be very low.

What you can do to combat the risk in the performance model is to also charge an upfront flat fee on top of any royalties you bring out. Now, you are able to cover your costs and eliminate the risk of not being paid at all. If the results are good you will make a significant profit, probably larger than with the other business models.

You might want to go down that road if you’re just getting started and you want to make your service accessible to people who cannot afford a high flat fee. You’ll also want to go with this model if you’re sure you can hit the goals you set most of the time. However, keep in mind that the performance model is probably the riskiest of the five service business models.

Pros (+)

  • Can yield much, much more than the other models
  • You can mitigate the risk if you receive an upfront fee
  • Best for expert service providers who know can hit the results

Cons (-)

  • Takes time to bear fruit
  • You’re not in control of other forces that might affect the results
  • You might not be aware of the client’s business situation
  • Risk not to get paid at all

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5. The project-based model

With the project model, you do estimate the hours needed beforehand, but you bill the client for the whole project. Usually, businesses that work on a project basis they get a portion of the total fee in advance and then bill the client per milestone or with the end deliverable when the project is complete.

The project model works great when you can define the scope of a job before it starts and can estimate how many billable hours it would take to complete.

If you can package your services together, like an architect, construction company or a website developer would do, then the project model can work for your business.

The project model can also refer to per-piece work. For example, a copywriter might be paid per article delivered.

With the project model, you’re able to create a higher revenue because you’re able to package services together into a premium package. Also, working on a project allows you to offer an upsell to your client more easily than when charging by the hour.

This revenue model for service businesses also allows you to better schedule your time and organize your resources. If you’re working by the hour instead, a client might need something on a short notice and expect you to adjust your schedule accordingly to deliver their urgent task.

On the other hand, there’s always the risk of you underestimating the amount of work involved. If this happens, you’ll end up working more hours and be paid less than your service is actually worth. If you don’t want to risk being in that spot, the monthly model may be a much safer alternative.

Pros (+)

  • Suitable for premium services that you can package together
  • Can create a higher revenue compared to the hourly model
  • You can get part of the payment in advance
  • Better allocation of resources

Cons (-)

  • Easy to underestimate the workload
  • Big projects can stall

How to choose the perfect business model

Choosing the right service business model can pave your path for a six-figure business.

There’s not a one-size-fits-all business model. So, how do you actually choose which one is the best fit for you, your team and customers? Which service business model will increase your bottom line faster?

Well, it depends; it depends on how you want to work with your clients and what type of work you do. It also depends on how risk aversive you are and how much you trust that your client has good processes and systems in place.

And, finally, it depends on the stage of your business. Are you just starting out or are you an established business?

For example, if you’re a new freelancer you might want to try the hourly model to gain experience and get your foot in the door of potential clients more easily.

On the other hand, if you’re an experienced service provider who works on a project basis, you might want to consider creating monthly packages for ongoing support, updates or coaching. Not all of your clients will need those monthly services but some will, and this way you can increase your monthly income easier than if you went out there seeking new clients.

It’s important to know your clients’ needs very well to create complete packages of services that work best for their and your business at the same time.

There are certain benefits and risks associated with each model. It’s advised that you take these into consideration when you structure your pricing plans.

All these service business models can work standalone or combined for pretty much all industries and anyone who provides service to clients who want to outsource part of their ongoing work.