You charge for your services, and clients complain that your rates are unfair and unmanagable.

Challenge

If you've instituted chargebacks, clients may compare your price for a bundle of services to a vendor's price for a subset of that bundle and think that you cost too much. This happens when your rate structure forces them to buy a higher level of quality or more features than they think they need.

They may resent your chargebacks because they don't feel they can effectively control costs. This may happen because your rates are difficult to understand, or because they're at too high a level of granularity (too much bundled in).

Or they may feel that you're making a profit on products you sell them, while undercharging for products they don't use. This is the result of a cost model that's not fully transparent.

How can you calculate rates in a manner that everybody understands, with a cost model that everybody believes in?

Solution

The calculation of rates begins with a clear definition of the products and services that client may choose to buy from your organization. The catalog must be at a level of detail that reflects discrete client purchase decisions; bundling only works when you're sure clients won't question the cost of the whole bundle. And separate purchase decisions (like enterprise-good services) must be represented as separate catalog items.

The next step is to decide the unit of pricing (dollars per what) for each product and service in that catalog. Units must be carefully chosen to be understandable, measurable, controllable, and at the right level of bulk.

Then a fully transparent cost model attaches all your costs to those products and services. Indirect costs must be amortized to just the right deliverables.

Comprehensive solution....

Other Resources

Case Study: Can You Really Know Your Full Cost of Service?
Riverside County IT found the way

Research report: Second-generation Cost Models
going beyond ABC, new product/service cost models improve accuracy and encourage entrepreneurship

Column: Chargebacks....

Column: Service-based Costing....

Anecdote: Chargebacks Are Killing Us
how implementing chargebacks can make things worse if you don't have the right tools and methods

Speech abstract: Service Costing 101
everything you need to know to plan an implementation of service costing

Speech abstract: Realistic Rates
how to calculate the true cost of your products and services

Speech abstract: Second-generation Cost Models
going beyond ABC, new product/service cost models improve accuracy and encourage entrepreneurship