Choosing the Right PEO Pricing Model: A Tale of Two Strategies

The Right PEO Pricing Model, Choose Your Journey

In the bustling world of business, where every decision can tip the scales, picking the right PEO pricing model might just be your next big win. It's like choosing between a steady monthly subscription or a pay-as-you-go service for your favorite streaming platform. Each has its benefits, depending on how you use it. Let's dive into different models that exist and the real-life stories of two companies that faced this choice and how it impacted their journey.

In the world of Professional Employer Organizations (PEOs), businesses have two pricing structures to consider: the Per Employee Per Month (PEPM) model or the Percentage of Payroll model. Both models offer distinct approaches to managing the costs associated with outsourced HR services. Let’s delve deeper into what each pricing strategy entails.

The PEPM model operates on a straightforward, flat fee per employee basis. This fee covers a comprehensive suite of core services offered by the PEO, such as HR support, payroll and benefits administration, workers’ compensation management, HR technology and platforms, compliance oversight, among other included services. It’s important to note that the scope of 'included' services may vary from one PEO to another. Additionally, PEOs may offer optional services like time and attendance tracking, expense management, and performance management, which can be billed on top of the base PEPM rate.  Once all solutions are selected, priced and purchased, the PEPM model provides businesses with a predictable, fixed cost per employee.

On the other hand, the Percentage of Payroll model is generally all-encompassing, though exceptions exist. In this model, fees are calculated as a percentage of the total payroll costs, including wages paid to employees as well as the business owners. This method aligns the PEO's fees directly with a company's payroll expenses, resulting in a fee that varies with payroll fluctuations. As such, if a company’s payroll increases, so do the fees paid to the PEO, and vice versa. This creates a variable cost structure that scales with your business operations.

In essence, the PEPM model offers a predictable, fixed fee structure per employee, ideal for businesses seeking budget consistency. The Percentage of Payroll model, conversely, provides a flexible, variable cost structure that adjusts with your payroll expenses, suitable for businesses with fluctuating payroll costs. Each model presents a unique approach to aligning the cost of PEO services with your business’s financial and operational needs.

From Fixed to Flexible: The Hospitality Group's Leap

First up, let's talk about a hospitality group we'll call "Eventide Eateries." Picture a popular chain with 94 employees, a mix of part-time and full-time, bustling in and out of kitchens and dining areas, serving up smiles and sumptuous meals. They were on a PEPM (Per Employee Per Month) model, a fixed fee that seemed straightforward but didn't quite fit their dynamic workforce.

The shift to a Percentage of Payroll model was like switching from a fixed cable plan to a flexible streaming subscription that better matched their viewing habits. This change saved Eventide Eateries a whopping $63k in administrative fees. The icing on the cake? They funneled these savings into new benefits for their staff, like dental and 401(k) plans, turning a good workplace into a great one.

A Calculated Shift: The Physician Group's Strategy

Now, let's pivot to a completely different scene—a physician group, "Harbor Health." They operated on a Percentage of Payroll model, which initially seemed to align with their pay structure. However, as their payroll ballooned, so did their fees, particularly for their high-earning physicians, leading to an unsustainable $2,400 per month in administrative costs just for this group.

Harbor Health's move to a PEPM model was a strategic play, akin to choosing a flat-rate phone plan over a per-minute charge when you know you're a heavy user. This switch led to an impressive $40,000 annual saving in administrative fees, all without compromising the quality of service they were accustomed to. It was a win-win, proving that sometimes, stability in costs can bring peace of mind and room to grow.

The Takeaway: It's About What Works for You

The tales of Eventide Eateries and Harbor Health shed light on an essential truth: there's no one-size-fits-all in the world of PEO pricing models. It's less about which model is better and more about what works for your unique business landscape. Think of it as choosing between a manual and an automatic car; it all boils down to your driving style and comfort level.

Your Next Steps

If you're considering a PEO or reevaluating your current setup, take a leaf out of Eventide Eateries and Harbor Health's books. Look beyond the surface and assess how each model aligns with your business's heartbeat—its people, its payroll, and its growth trajectory. And remember, the best decisions are made not just with the ledger in mind but with a clear understanding of your team's needs and your business goals.

Choosing the right PEO pricing model isn't just an administrative decision; it's a strategic move that can significantly impact your business's efficiency and employee satisfaction. Whether you lean towards the predictability of PEPM or the scalability of Percentage of Payroll, ensure it's a choice that resonates with the rhythm of your business and the well-being of your team. After all, in the grand scheme of things, it's these day-to-day decisions that shape the legacy of your business.