Common Pricing Models In The Facilities Management Industry

As a business, pricing your products/services you sell is one of the most vital decisions to make. Facility management (FM) entities are no different, and getting their pricing right inadvertently makes or breaks it for them. 

Facilities management encompasses a diverse range of services, from maintenance to cleaning and security. So, pricing models in the FM industry often act as the framework for businesses to determine the level of deliverables, responsibilities and how to go about their job. 

This article discusses the most commonly used pricing models in the FM industry. 

What is a Pricing Strategy?

A pricing strategy is a process through which you price your product or services. Also known as the pricing method, getting your pricing right is more than just putting a price tag on your product or service. Given that facility management encompasses a series of sub-services, it is more of a calculated move. 

Your pricing strategy directly influences your revenue and how your potential customers and others in the market perceive you. While your pricing strategy must align with your business goals, you must also pay heed to the prevailing competitor prices to give yourself a chance to have a bite of the cake. 

Prevalent Pricing Models in the FM Industry

Given that a diverse set of factors affect it, there cannot be a 'one-size fits all' approach for getting your pricing right. There are a lot of pricing models prevalent in the FM industry, but here are the most popular ones – 

Input-based Pricing or Cost-plus Pricing Model

• Direct, indirect and fixed costs are pre-determined and a margin is added and passed to the service provider.
• The supplier discloses the cost of materials used, compensation to the workers, sub-contractor rates, and profit margin to ensure transparency. 
• Any additional cost is usually mentioned upfront. 

Getting your pricing right in a service-based industry can often be a challenge, especially if you are new or if the project in hand is an intricate one. In such cases, FM companies often opt for an input-based pricing model. Popular in the 2000s, here, the fee structure is linked to the time or effort required to deliver a service and the cost of tangible products offered. 

For example, if an FM service provider is assigned the task of cleaning of a building or routine maintenance, they can calculate the fee based on the number of days/hours the team works for the same. Here, they can quote INR X per day/hour multiplied by the number of hours daily/monthly for the functions. This model works best for clients with a fixed budget and cannot afford fluctuating outflow for the same tasks periodically. Any budget overruns in these cases can be informed to the client upfront to ensure that the service provider is not at a loss. 

GMP or Guaranteed Maximum Pricing Model

• Sets a maximum payable price for the project.
• Considered a 'Heads - Win, Tails - Win' for the client.
• The client doesn't share profits unless explicitly stated in the contract. 

Guaranteed Maximum Pricing (GMP) contracts are those where the buyer agrees to reimburse the service provider for the materials, labour and fees that cover profits. The GMP is the maximum amount payable by the client, but if the final payable amount is less than the same, the client is not required to share the amount saved with the provider unless it is explicitly mentioned in the contract. 

For this, GMP contracts often come equipped explicitly stating the need to share profits if the final payable amount is less than the maximum price. On the other hand, if the service provider suffers from a budget overrun, the client is not responsible for bearing the additional amount unless there is a change in scope and specs.

Outcome-based Pricing Model

• A newer age concept that makes the provider more answerable. 
• It focuses on rewarding productivity rather than activity. 
• It balances incentives for both the parties - the provider and the receiver. 

In the modern day, the focus of pricing is gradually shifting from activity to productivity. Businesses are gradually shifting from 'risk to the buyer' pricing models to a more balanced approach with benefits stated upfront for both parties. Outcome-based pricing is a prime example of that, and the fee is linked to a specific business outcome. 

For example, if an FM service provider takes up the task of reducing energy consumption in a facility, the outcome-based pricing may vary according to the amount of additional energy savings. The outcome-based pricing model delicately balances the cost of services and ROI (return on investment), and it has implications for the buyer (risk) and the seller (maximum profits), too. 

Vested Pricing Model

• Follows the new-age trend of making the provider more answerable for the outcomes.
• Requires collaboration and a high level of trust between the provider and the client.
• The budget has to be proposed to the buyer for approval before the work begins and is regularly updated. 

The vested model of pricing has gained considerable popularity in the FM industry in the last few years. This concept goes beyond the usual buyer-seller relationship and instead focuses on a more collaborative approach to ensuring the project's success. Such contracts are designed to align the client and provider's interests on outcomes that would benefit them both fairly. 

The focus of the vested model is on the what and not the how. So, the service provider decides how their services would be delivered, such as training, safety, supplies, scheduling and compliance with industry quality and safety standards. They are seen as an extended member of the client instead of an outsider and are rewarded if the actual results exceed the standard expectations. So, there is a vested interest of both parties in such a pricing model. 

How to Choose the Right Pricing Model for Your FM Business?

In a complex industry like Facility Management, it is difficult to ascertain the best pricing model as there are numerous factors involved. In order to succeed, the key is to be flexible and figure out what works best for you. While some brands are happy to offer a cost-plus or input-based approach, others may not be as comfortable with the transparency it requires. 

So, here are some things to keep in mind while choosing the right pricing model for your FM business-

• Understand Client Requirements: Assess the client's expectations, priorities and risk tolerance.
• Mitigate Risks: Select a model that balances profitability with risk management, ensuring consistent service delivery.
• Focus on Cost Management: Choose a model that allows you to manage costs effectively while delivering quality services.
• Align with Deliverables: Opt for output or outcome-based models if you can clearly define and achieve specific deliverables.
• Strategic Partnerships: Consider the vested model for long-term relationships and innovation-driven services.

Conclusion

Getting your pricing right is very crucial for any business, and it's no different for those in the FM industry, too. For starters, getting to know all the available options and finding which ones would work best for you should be the goal. 

Once you have chosen the default pricing model, the next step is to align them with your operational capabilities and deliverables. That way, your pricing would be justifiable and would also give you ample space to thrive and achieve your organizational goals.