Transactional Pricing: What is it, and what does it mean for your business?

Sometimes it may seem as if there’s a different pricing model for every B2B service provider out there. It can be confusing, time-consuming, and utterly tedious to discover the ins and outs of every model or proposal.

There are major categories of pricing, however. Most of the schemes and models constructed by service providers usually fall within one of these categories. There may be slight differences in the details, but the broad strokes should be recognizable.

Among these main types of pricing models is transactional pricing. In a transactional relationship, a service provider charges their client based on the number of transactions performed over a specified time. Each transaction has been valued, and prices are multiplied by the amount of transactions, then summed up for the time period.

To put it in other words, transactional pricing is based on the amount (and type) of work performed. But what does that actually look like?

A Day in the Life of Transactional Pricing

Say you run a distribution center. You’ve contracted with a temp labor provider to provide staffing services for every associate position inside the building. From the time a product enters the door, to the moment it goes out another, it’s being handled by someone from the temp labor provider.

An order comes in. It goes through your management and shipping software, and ends up in a list of orders for the distribution center. A team member sees the order as the next item on the pick list. When the product is picked, it’s sent to sorting. From there to packing. From packing to the loading dock. Finally, from the loading dock onto the truck.

How many transactions was that? One? No. Depending on your contract with the temp labor provider, each time an associate handles the product — from first pick to final loading — might count as a transaction. Because each step of the process involves time and effort, the labor provider puts a price on each of those steps.

At the end of the day, every single transaction has been logged. The data feeds into the labor provider’s accounting software, and comes out on the final invoice for the month. 

What is Transactional Pricing Good For?

Transactional pricing benefits purchasers by greatly diminishing the upfront financial commitment. Instead of paying for an entire contract, or a big part of it, the purchaser only pays as work is completed. This “pay as you go” structure allows for greater flexibility, and helps relieve pressure on cash flow.

That flexibility is crucial for businesses whose production volumes vary throughout the year. When demand is low, less work is needed, and costs are lower. When demand goes up, more transactions are created, but the higher costs can be absorbed by the increase in revenue. 

Even labor providers themselves benefit from the flexible nature of transaction-based pricing. Because client needs might vary significantly throughout the year, and at different times depending on industry, the labor provider can shift human resources back and forth more easily.

What are the Drawbacks of Transaction-Based Pricing Models?

Look back at our example of the distribution center. Even in a simple sketch, the workflow in a DC is a complex undertaking. People and products are moving around constantly, and every process has its own set of steps (a miniature process) to guide everyone’s work. 

Depending on how your contract is structured, a traditional temp labor provider in that example might be charging for a truly eye-popping number of “transactions”.

As we mentioned, transaction-based pricing allows for significant flexibility for the purchaser. However, that flexibility does come with a price. Literally. And that price may not be the price you were expecting. 

Because the total price of services is directly related to the amount of work done, costs will inevitably go up whenever volume or production increases. Then, in quieter times, you could see your labor costs plummet. Too much of that back-and-forth, up-and-down and you’ll get whiplash.

Perhaps the biggest drawback associated with transaction-based pricing is its emphasis on charging for work, rather than production. For example, if you’re working with a labor provider on a transactional basis, they know they make money based on how much work (how many transactions) their workforces put out.

But “work” isn’t the same as “shipments out the door,” or “products manufactured,” or “parcels distributed.” Work is just work. It’s just transactions. It’s all too common for purchasers to find themselves stuck paying for things that don’t actually propel their business forward. (At nGROUP we exist to change that. Details below) 

Is Transactional Pricing Right For Your Company?

As with so many of these questions, the answer greatly depends on your business, your industry, and your objectives. Let’s recap the highlights about transactional pricing:

• Transactional pricing models charge customers based on the number of transactions (the amount of work) done in a specified time.
• Because customers only pay for work as it’s completed, there’s little or no need for large upfront investments.
• Flexibility is huge: customers can be flexible with the scope of services required, and vendors can be flexible with their resources.

On the other hand, some of the drawbacks include:

• The definition of a “transaction” can be pretty broad, and customers often find themselves paying for a mind-numbing variety of “services.”
• Prices can be volatile in a transactional relationship, especially if the need for the provided services goes up and down over time.
• Transactional models result in customers paying for “work” rather than “production.”

At nGROUP, we use a variety of pricing models for our recruiting and labor management services. Our clients come in all shapes and sizes, and from all sorts of industries. There’s simply no one model that could possibly fit everyone.

We use transactional pricing where it makes sense, and we also use cost-per-unit (or CPU) pricing in some circumstances. Either way, our goal is to meet our customers where they are, not to impose a system on them. 

If you have questions about transactional pricing models, and whether your business could benefit from them, give us a call today. 

Our experts would be delighted to chat with you, learn about your needs and objectives, and give you answers backed by years of experience. Click here to schedule a call.