What Is PEPM Pricing and How Does It Work?
Gain clarity on Per Employee Per Month (PEPM) pricing. Learn about this prevalent, predictable billing model that simplifies recurring service costs.
Per Employee Per Month (PEPM) pricing is a widely adopted billing model, particularly prevalent in service-oriented industries. This structure involves a fixed fee charged for each employee over a specific period, typically on a monthly basis. Its design offers a straightforward approach to cost management, providing clarity and consistency in recurring expenses for businesses.
Understanding the Per Employee Per Month Concept
The PEPM model functions by establishing a set rate applied to each employee within an organization. What constitutes “per employee” can vary, often referring to active employees on the payroll, full-time equivalents (FTEs), or specific licensed users accessing a service or platform. This definition is typically outlined in the service agreement, ensuring clarity on the basis for billing. For example, some agreements might count all individuals receiving a paycheck, while others focus on those enrolled in a particular benefit or using a specific software license.
Calculating the monthly cost under a PEPM model is a simple multiplication of the agreed-upon PEPM rate by the current number of employees or users. If a service charges $50 PEPM and a company has 100 employees, the monthly charge would be $5,000.
The consistent nature of PEPM charges aids businesses in financial planning and budgeting. They can forecast service expenditures accurately, which helps in managing cash flow and allocating resources effectively. For service providers, this model offers a stable revenue stream, facilitating their own financial projections.
How PEPM Rates are Structured
Service providers determine PEPM rates by considering several factors that influence the overall value delivered. The scope of services and included features directly affects the rate, with comprehensive packages or premium tiers commanding higher fees. For instance, a basic human resources (HR) platform might have a lower PEPM than one offering advanced analytics, performance management tools, and extensive compliance support.
Volume-based pricing is another common element in PEPM rate structures, where a larger number of employees can lead to a reduced per-employee rate. Providers often offer discounts for higher employee counts, recognizing the efficiency gains from serving a larger user base within a single client organization.
Tiered pricing models are frequently implemented, setting different PEPM rates for various ranges of employee numbers. A provider might charge one PEPM rate for companies with 1-50 employees, a slightly lower rate for 51-200 employees, and an even lower rate for those exceeding 200 employees.
Additionally, optional or specialized services may be priced separately or as incremental additions to the base PEPM. These add-on services, such as enhanced customer support, custom integrations, or specialized reporting, allow businesses to tailor their service package to their specific needs, allowing companies to only pay for the functionalities they require beyond the standard offering.
Where PEPM Pricing is Applied
PEPM pricing is widely utilized across various industries, particularly for services that scale directly with the number of people in an organization. Human Resources (HR) software platforms frequently employ this model for their services. Payroll processing, human resource information systems (HRIS), and talent management solutions often charge a fixed fee per employee, per month, for managing employee data, processing paychecks, and handling compliance.
Employee benefits administration is another significant area where PEPM is common. Services related to health insurance, wellness programs, and retirement plan administration, such as 401(k)s, typically bill employers on a PEPM basis. This allows companies to manage the costs associated with providing benefits to their workforce in a predictable manner. The fee covers the administrative overhead for each enrolled employee.
Certain IT services and software licenses also adopt the PEPM model. Cloud-based productivity suites, cybersecurity solutions, or managed IT support for end-users are often priced per user or per employee. This ensures that a business pays for the access and support directly correlating to the number of individuals utilizing these technological resources. This model simplifies budgeting for technology expenditures that are tied to workforce size.