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All right y’all. Hey, welcome back to the podcast. Glad to have you, always.
Today, I’m talking about pricing models. We’re not talking about fee setting, necessarily. I’ll cover that in other episodes, and we’ll certainly circle back to that at some point, I’m sure. But today I’m talking specifically about pricing models and the two primary models that we use; flat fee pricing or hourly pricing for our evaluations. Both can be an appropriate fit, but I think there are some differences, some personality factors, and a few other factors to take into account as you decide on your pricing model.
So I’m going to talk through things like the psychology behind pricing models, consumer preferences in pricing models, and the pros and cons of flat fees versus hourly pricing in our business. And then I’ll wrap up with a little bit of a recommendation, I suppose, for how to price your evaluations.
Before I get to the episode, I want to, of course, invite all of you to consider a Testing Psychologist Mastermind group. I have transitioned [00:02:00] at least for the next six months entirely over to group consulting. And to that end, just continually enrolling cohorts for beginner practice owners, intermediate practice owners, and advanced practice owners. So if you are looking to level up your practice or even just launch a practice and you’d like some group support and accountability, I’d love to chat with you. You can get more info at thetestingpsychologist.com/consulting, and give me a shout.
Okay, let’s go talk about pricing.
All right y’all. Like I said, we are diving a little deeper into pricing models in this episode. Let me start out and just talk about why this is important. The pricing model you use is important because it determines how you make money in your practice and if you make enough money in your practice.
When I wrote an article a few years ago, it’s called three ways you’re losing money on your practice and what to do about it, I think there was a podcast episode as well, under billing is one of the three main ways that we lose money. You can underbill in either a flat fee model or an hourly model, but part of the deal is being super cognizant about the model that you use and which one suits you the best.
It’s important because a lot of folks just do what their colleagues do or do what they find in a Facebook group or maybe just jump into it without any research whatsoever, and you can end up in a [00:04:00] situation where you are not collecting or billing enough money for the time that you’re spending.
So as far as the psychology of flat fee versus hourly pricing, you can come at this from a couple of different directions; from the consumer side,i.e, clients who are coming to seek our evaluation. From the consumer side, the economics research is pretty clear that consumers prefer flat-rate pricing. So that in and of itself would suggest that we just do flat-rate pricing, but it’s not that simple because flat-rate pricing, though it is simple and it gives the client a really clear picture of what to expect, there are some nuances there, which I’m going to talk about here in just a bit. But just so you know, from the research on this topic, consumers do tend to prefer flat-rate pricing.
The interesting thing is that producers or clinicians in our case also prefer flat-rate pricing. I’ve talked on the podcast before about the concept of value-based pricing and that’s directly related to why producers prefer flat-rate pricing.
If you think about the idea that if you’re running an hourly pricing model and you get more efficient with your report writing, which could happen for a number of reasons: it could be dialing in your report template, it could be writing software that assists with the report writing process, it could be [00:06:00] just getting better at your job and thinking more clearly and being able to write more quickly and efficiently, any number of reasons that you might get more efficient with your evaluations, you’re actually then penalized if you price using an hourly model. That’s true across most industries. So a flat-rate pricing model from the business side of things tends to fit well for high producers who work efficiently.
With all that said, the research is pretty clear that both consumers and producers prefer flat-rate pricing, why don’t we do it more often? Well, here are some reasons that I think we don’t do it more often. Some of the negatives or downsides of flat-rate pricing models are:
One, in our case specifically, the vast majority of clinicians will set their flat rate too low. This is so true in my consulting both group and individual, when I’m working with clinicians and we talk about fees, folks who are charging a flat rate tend to set that rate too low.
The reason for that I believe is that we underestimate the amount of time that we’re spending on our evaluations. And we tend to ballpark more than derive our flat rate from data. Most folks get squirrely when they’re setting their fees pretty. I mean, it’s always multiple thousands of dollars if we’re talking about a flat fee for an evaluation and folks get squirrely. We are cognizant of how that impacts people, impacts clients, and I think are afraid of sticker shock. [00:08:00] And so, we’re hesitant to go as high as we probably should.
So, as I talked about earlier, if you’re doing a model of value-based pricing, which is basically the idea that a person is paying for the service as a whole and not paying for the amount of time that you spend on it. So this is the idea that someone… And this is a big departure from what we’ve been trained to do from an insurance model where they reimburse by the hour, certainly from other service models. There are a lot of service models that bill by the unit, which is typically an hour or half-hour, certainly time-based.
If you think about like labor costs for getting car repair done or work on your house, things like that, attorneys, a lot of people do hourly units, but if we’re talking about true value-based pricing, then the client is paying for the service and the expertise. They’re not necessarily paying for the time that you spend on it.
All of that said, if you’re trying to do a value-based model, you’re actually selling yourself short by underbilling. So that’s one of the biggest downsides of setting a flat rate. The vast majority of clinicians will set that flat rate way too low.
Another one is that some clients may bulk at a larger number for a flat rate. So, some clients may, and this depends, I think it depends geographically, demographically, and socioeconomically, although the research, on the whole, says that consumers prefer flat-rate pricing because it’s a little more certain and they know what to [00:10:00] expect if you’re billing that flat rate all in one go, that can be intimidating for some clients.
I would advise you do a flat-rate model that you break it up into a series of payments. So maybe you collect for the intake or maybe you do a deposit, but then applies to the intake, then you charge half on testing and half on feedback, something like that. But I certainly know practices that just charge the whole thing all at one time, although you do run the risk of clients bulking at that larger number.
One way that you can combat that, however, is by taking advantage of, not taking advantage of, being mindful of another aspect of consumer psychology which is, folks tend to only focus on the left-most digit of a price. I’m exaggerating, but theoretically, $1,100 is the same as $1,900 when we think about consumer spending and the psychology of money. So you can keep that in mind if you are trying to raise your fee that spending-wise, it may not make a huge difference if you go from $2300 say to $2,800 or $3,200 to $3,900. You might start to see a little bit of a dip in conversions and clients’ booking if you cross over that left digit threshold, say from a 2 to a 3 or a 3 to a 4.
Another downside of the flat-rate model is that it is the easiest in a private pay model. It is admittedly very hard to make this work with insurance, though you can certainly present it to clients in a way that appears like it’s a flat rate.
What do I mean by that? I mean that [00:12:00] you can get a good estimate of coverage and benefits for a client and present the evaluation cost to them as a flat rate. You can say, this evaluation is going to cost, let’s just say $1,873 based on your deductible and copay. So if you get a really good, accurate estimate of benefits and coverage, you can present the cost for the eval like it’s a flat rate and take advantage of some of the advantages of the flat rate, which is people knowing exactly what to expect even though it’s going to be an hourly pricing model through insurance. That said, it is certainly easier and more flexible to do a flat rate when you’re in a private pay model.
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All right, let’s get back to the podcast.
The last downside, I think is some clients may not feel that they’re getting truly tailored or flexible evaluations or personal evaluations. A flat fee can sometimes come across as a one size fits all model. Again, this gets into the psychology of the whole thing. If you’re doing value-based pricing, it’s again, not the idea that you are billing for time, which tends to translate more or correlate more in clients’ minds to a more personal evaluation, but that that they are paying for your expertise and for the service more than anything. These are a few of the downsides of a flat-rate pricing model.
Now, why would you do a flat rate? Well, we’ve already talked about how consumers and producers tend to prefer it, but here are some specific reasons.
One, if you are more efficient, then you get more value, right? So this is, again, going back to that value-based pricing. The client is paying for the service and not necessarily the time. So you’re not penalized if you get better at your job, if you consider better to mean you’re more efficient while still maintaining high quality and hopefully increasing the quality of your evaluations.
The second point as I’ve talked about is that consumers do prefer it because of the expectation. People like knowing exactly what to expect in terms of pricing and payment. And the interesting thing is that consumers will still prefer a flat-rate model even if the cost of the flat rate is higher than it would have been if it was just billed hourly. So there was something really powerful about people knowing what to expect and the transparency [00:16:00] of a flat-rate model that goes a long way. So if you do a flat-rate model, you can rest easy knowing that you are using the model that most folks prefer.
Another positive aspect is that you can do a flat rate and still do payment plans like I mentioned earlier, or multiple payments. So you can break those payments up. It doesn’t have to be this monolith of a charge on someone’s credit card or out of their bank account. You do have a lot of flexibility with how you present the payment schedule for that flat rate.
The last component is just it leads to clear communication. I think it makes it easy to communicate the cost of an evaluation on your website, in your phone script- which I know you have, and in the other places that you are talking about fees with your clients. So I think it simplifies things quite a bit.
Now, let’s flip over and talk about an hourly model. So what are some pros of an hourly pricing model? Well, one is that if you’re good, you are theoretically more likely to bill for all the time that you’re spending. So if you are tracking your time and billing by time, as long as you are pretty diligent about tracking that time, then theoretically, you should bill for all the time that you’re spending in an hourly model.
I think that was an implicit downside of a flat-rate model is that when people set flat rates, they don’t pay attention to time as much, that’s also a plus, so you don’t have to worry about it. But again, the downside is that you might underbill. On the hourly model, if you’re billing for all the time that you’re spending and you have to account for all that time, then [00:18:00] you should have a lower risk of underbilling.
The next positive component or aspect of the hourly model is that again, theoretically, you can create a more tailored experience for the client. There is a relationship, I think, between doing a flat fee model and a more fixed approach in some cases. So if you’re billing by the hour, that can free you up a little bit more, at least in your mind, at least again, hypothetically to create a more tailored experience for the client where you can add academic testing if they need it, or you can add autism assessment if they need it or that extra measure, or you can drop measures if they don’t need it. So again, that flexibility is I think, a huge upside of an hourly model.
Now, what are some downsides of doing the hourly model? Well, underbilling is always a risk. So again, you have to track your time pretty carefully, and most of us do underestimate it. So underbilling is always a risk with either model.
Another downside though, is that, again, consumers do not prefer it. I think you have to be extra transparent or extra diligent in communicating costs if you’re going to do an hourly model because people, and maybe you’ve been in this situation, people do not like being surprised by charges that they weren’t expecting. So, I think you have to go the extra mile if you’re doing an hourly billing model to communicate to the client what the charges are going to look like. And it can get a little awkward.
I’ve had conversations with consulting clients where I surprised them with hourly charges that they weren’t expecting. I’m just kidding. But I have had [00:20:00] conversations with consultant clients where they have awkward conversations with clients. When they want to add extra measures or do some extra assessment, it can be hard to go back and ask for more money. And again, people do a lot better when they commit to something upfront versus adding more as they go.
And the last downside which I’ve alluded to is that it is more work to actually track your hours. If you’re doing this for insurance, of course, you have to do it no matter what, but you do have to spend the time to actually track those hours that you’re spending on an evaluation.
Okay. So pulling all those together, what would I do?
Here’s what I advise folks. Even though it seems counterintuitive, I always advise folks to start with an hourly model until they have really dialed in the amount of time that they’re spending on an evaluation because I would rather spend a little more time, do a little more work to track the hours in the hope that it will make you a little more mindful of all the time you’re spending rather than set a flat fee and risk underbilling.
I’ve just had so many conversations with consultant clients about how their flat fee is not representative of the time they’re actually spending. So, I actually advise that people start with an hourly model, get your feet underneath you, really get a good understanding of how much time you’re spending on your evaluations, and then you can move to a flat fee when you can be certain that you won’t underbill. That is the main [00:22:00] concern. The hope is that you can make that transition pretty quickly because, again, a flat fee is highly preferable for everybody if you have the flexibility to do it, like with the private pay model specifically.
That’s the takeaway here. If you’re just starting out or if you’re really wrestling with fees and billing, start hourly, get a good tracking system in place, really understand how much time you’re spending on the eval, and then you can move to a flat fee model when you are certain that you can set your fee high enough to account for the time that you’re spending.
Independent of whatever model you use, I just want to highlight the importance of keeping a credit card on file. I’ve talked about this on the podcast before, and this is just a little cherry on top of this discussion that requiring a credit card goes so far in terms of people paying their bills and not losing money that you might otherwise not be paid. So, keep that in mind as well. No matter what pricing model you use, keep that credit card on file.
All right. Thank you for listening. Thanks for diving in with me to these models. I’m curious if there are any other models out there. I know there are hybrids. I know there are concierge models. I know that there are other ways to do things, but if you’re out there and you’re running a model different from the flat fee or hourly, let me know.
Send me an email. I’d love to hear from you and have more of a discussion in a later episode, perhaps.
Like I said at the beginning, if you are a practice owner at really any stage of business development, I would love to support you in growing your testing practice. We’ve got beginner, intermediate and advanced cohorts enrolling all the time. [00:24:00] And I think, let’s see, there should be new cohorts of each of those starting within the next month. So May-ish. So give me a shout if you’d like to chat and see if a group could be right. You can get more information and schedule a pre-group call at thetestingpsychologist.com/consulting.
All right, I’ll be back with you on Monday with a clinical episode. Bye-bye.
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Please note that no doctor-patient relationship is formed here, and similarly, no supervisory or consultative relationship is formed between the host or guests of this podcast and listeners of this podcast. If you need the qualified advice of any mental health practitioner or medical provider, please seek one in your area.[01:08:00] Similarly, if you need supervision on clinical matters, please find a supervisor with expertise that fits your needs.