What Is a Flat Rate

By Indeed Editorial Team

Published April 5, 2021

A flat rate is one of the simplest and profitable pricing structures. It requires you as the service provider to generate the standard price for all the services you offer. The faster you work, the more profits you make. This is because you will take less time on a specific task and pick another one. The fastest employee completes the most tasks, ending up with the highest profits. In this article, we review what is a flat rate, the benefits of offering it and how to set one for yourself.

What is a flat rate?

A flat rate is a pricing structure charging a fixed fee for a specific service. It does not vary regardless of the situation, time or place. For example, a subscription model offering the clients a set price per year or month for full access. No matter the number of times a subscribed client visits the site or uses the service, the charges remain the same.

It is a rate at which each completed job is paid regardless of the time taken. The employer or the client has to estimate the time to be taken on the job to ensure that the technician does not overcharge. Also, the technician evaluates the time needed by the task and the cost of the materials used to ensure they make profits. A flat rate presents a defined product to the client and the employee. The employee benefits by working as fast as they can, while the client doesn't have to worry about any challenge that may arise in the process due to increased costs.

People using the flat-rate pricing strategy

This model is common with businesses selling products to consumers. Most consumer subscriptions offer a one-time subscription price. Examples include:

  • Advertising: Purchasing advertisements usually in sites such as virtual video services and social media are done at flat rates. For example, a video service may charge $0.30 per view.

  • Postage: Postal service uses the flat-rate pricing model regarding the delivery of the items. To avoid weighing items, the postage companies have different boxes, envelopes or post. The on-hand cost helps clients identify the charges and remove the inconvenience of estimating the cost. The postal service uses a flat rate for packages, offering different options varying in shape and size.

  • Tradespeople: Tradespeople such as plumbers mechanics and electricians also charge flat rates for their services. They have an average charge per hour or per day, regardless of the quantity or quality of the work output in the set time.

  • Television: Many TV services charge a flat monthly amount for a bundle or channel.

  • Telephone: Telecommunications companies usually offer a set of flat rates to their residential clients.

  • Internet: Flat rate is usual in broadband internet access in the country and all over the world.

  • Labor: A client sometimes pays a fixed amount for a task to be performed, regardless of the time it would take the employee. Flat-rate models base their studies on the time taken to complete the task.

Related: What is a pricing strategy?

Benefits of offering a flat rate

The flat rate system is becoming more popular for many tasks in the current days, usually the home services. Customers are referring to it as they already know how they need to pay them for a service, and they can easily tell whether it's worth the cost. A flat rate can also present some advantages and disadvantages to the service provider as follows.

The advantages include:

  • Potential for larger profit: Provided service providers work efficiently and quickly, they can usually earn more in a flat rate system than in hourly rates.

  • Simplicity: A service provider may wish to keep bookkeeping and administration as simple as possible.

  • Transparency: Flat rates fees are transparent as everyone knows the cost even before the service is done and it is easy for clients to understand. For example, when a business charges a flat rate for a service, potential clients can decide whether they can afford the services, unlike the hourly rate where the client may owe the service provider more than they expected if the service took longer than planned.

  • Packaged rates: It is easier for a flat pricing business to project revenue or profits per job done. You already know how much each client will pay, even regardless of the time involved.

Disadvantages of flat rates

Disadvantages include:

  • Unexpected difficulties: In a flat-rate system, any obstacle that comes in the line of productivity reduces the income generated. Time is a factor in this system and anything taking longer means less job to be done. For example, a contractor may take a job at a flat rate based on how difficult the job seems to be. The job might be more difficult than expected, and the flat could not count for every hour passed on that project. A flat rate may not be the best system to use in complex tasks or those likely affected by unforeseen problems.

  • Quality of service: Flat rate pricing emphasizes performing many tasks in the shortest time to maximize profits, which can lead to poor quality output. For example, a contractor working on a flat rate might take shortcuts just to finish the tasks and bid more clients. They may not be concerned about the quality of the output as an hourly contractor would.

  • Requiring frequent updates: The cost of parts, raw materials and the salaries of your employees may increase and necessitate the need to update service rates.

Read more: How to overcome challenges in the workplace.

How to set a flat rate

Follow these six steps to set your flat rate:

1. Learn about the market

Study data about how much your target market customer will pay and average costs competitors charge. Ensure the price you set covers all of your costs.

2. Work out your costs

Sum up all the direct and indirect costs for the production or the offering of the services to ensure the price you set covers all of your costs. After adding all the costs, divide by the volume of the product to come up with a price.

3. Consider other costs

For example, consider shipping and any other production costs.

4. Consider cost-plus pricing

Set the flat rate by adding a margin to your breakeven point.

Read more: How to identify a target market.

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