A pricing model is a part of a contractual agreement, signed between a client and a service provider (IT partner). The agreement designates working methodologies, time frames, and pricing. Apart from design, coding, testing, and deployment, custom software development includes a range of other activities. And in order to pick the right software development pricing model, start with the first and the foremost:

  1. Define the key collaboration principles with your IT partner
  2. Determine all possible risks
  3. Discuss and document responsibilities

Most companies intend a long-term strategic partnership with their clients. Be it an IT startup or an app development company, it is quite a challenge to ensure a trustworthy collaboration and flexibility. Therefore, the most important thing before you launch a project is to choose the right business model through clarifying conditions and requirements.

But how should a product owner pick the right strategy? Well, if you need a few tips in this matter, let’s dig a little deeper and do an overview of the cooperation and pricing models.

Time & Material

This model assumes that billing is based on the actual time and cost of materials invested into the development process. It requires constant supervision and active client’s involvement. It is important to track changing priorities of projects with dynamic requirements, ongoing adjustments, and evolving product development. Nonetheless, this method provides increased flexibility in terms of project requirements, scope, and functionality.

How it works

This pricing model is mainly used when it is not possible to fully identify specification and implementation methods at the beginning of the project. The development work is billed monthly on a jointly agreed hourly rate. The Time & Material (T&M) software development pricing model is flexible and adapts to clients changing requirements for time and resources. It suits clients who want to control the overall development process.

When it suits best

The Time & Material method suits best for longer in duration (medium to large scale) projects and assumes that specifications can be revised during implementation. Considering the fact that the common aim of collaboration (e.g. of a startup with an app development company or another IT partner) is to deliver the best technological solution, the Time & Material method allows both parties to work out the solution together.

So, if there is no detailed project documentation, the project requirements are regularly changing, the exact deadline is not set, and you plan a long-term cooperation with the IT partner, the Time & Material method suits your project well.

Benefits vs. drawbacks

Benefits:

  • Flexibility: you can change requirements, add/drop features, or even pivot without rethinking your budget and timeframes
  • Low risk: negotiable and flexible budget, which can be beneficial for both parties
  • Agile approach: Time & Material pricing model uses agile methodology, which suits  large and long-term projects perfectly well
  • Control and tight collaboration: all tasks and enhancements on client’s demand

Drawbacks:

  • Undetermined time limits: the method relies on small milestones, so the final deadline remains unclear
  • Less controlled budget: hard to estimate the final cost, the total budget is unknown until the product is finished
  • Control and tight collaboration: client’s involvement requires more time and human resources than in Fixed price model

Fixed Price

The Fixed Price model is primarily used in projects with a clear outcome or with a strict budget. It is built in accordance with the cost and time estimates which are based on the project details provided by the client during discovery phase – the first collaboration stage. All payments are made at predetermined times; the budget is fixed, the deadline is set.

How it works

As the name suggests, the Fixed Price model relies on a pre-defined budget and schedule. This method demands full-grown technical planning in the form of specification, which allows predicting all risks beforehand. The key development stages are defined during discussion and, in most of the cases, waterfall methodology is applied.

The Fixed Price projects are commonly not supposed to be changed during implementation, however, they require some participation from the customer (e.g. prompt feedback and on-time decisions), since any deviations from the original plan result in additional expenses.

When it suits best

The Fixed Price method is perfect for small well thought-out projects of low to medium complexity. It perfectly suits projects with clear and well-documented specifications, predetermined delivery period, fixed budget and time-frame.

This software product development pricing model is also suitable for medium scale projects with a very clear scope when requirements are clear enough to reach expected milestones upon the timeline. This method does not assume an active client’s involvement, as the workflow is fully controlled by the project manager (e.g. hired by the software development outsourcing company).

Benefits vs. drawbacks

Benefits:

  • A transparent and predictable development process
  • Little supervision from the client’s side (all requirements are defined beforehand)
  • Coordination of the development process is carried out by the project manager
  • No overpayments, the entire amount is agreed in advance
  • On-time and on-budget product delivery by the IT partner, no turn-ups
  • High level of motivation for software development outsourcing companies to be efficient

Drawbacks:

  • The cost of the project might be overestimated in order to cover all possible risks
  • The quality of the product might suffer in terms of agreed timeframe (every new problem might result from a shortcut, made by the team to meet deadlines)
  • Low flexibility in management of additional features (any change may require re-negotiation of the delivery schedule and price)
  • Lack of communication with the IT partner about the workflow

Dedicated Team

The Dedicated Team model assumes that billing is based on hourly rates of the developers who become a part of a team that is only concerned with your project and not engaged in any other tasks. The developers report directly to the client, meanwhile, the client is responsible for the team management and control.

How it works

The Dedicated Team is a unique cooperation approach that has something in common with both Fixed Price (FP) and Time & Material (T&M). In the Dedicated Team model, a client has full management control over the project and the team. In the meantime, the dedicated team-works as part of the client’s infrastructure and follows corporate culture and policies.

A product owner manages the project development team on a daily basis through regular Scrum meetings, which makes this model a good fit for agile development. In case your startup doesn’t have a strong in-house project manager, a custom software development company (from Ukraine, US, EU, UK, or any other country that offers outsourcing services) can provide you with a dedicated project manager.

When it suits best

The Dedicated Team model suits best medium to large scale, long-term projects that require a big team and presupposes vague requirements, and frequent changes. As it has the highest level of transparency and straightforward pricing: a fixed service fee, which depends on the size of the team, is billed monthly. The average price for the dedicated resources of software development outsourcing teams is lower than for your local developers, which overall means much lower expenses.

Here is a case study of successful IT outsourcing to Ukraine within a Dedicated Team model. FuboTV, initially a startup, became a leading football video streaming service in the US, due to close cooperation with Vakoms, Ukrainian custom software development company.

Benefits vs. drawbacks

Benefits:

  • Predictable and transparent budgeting
  • Straightforward communication
  • High effectiveness
  • Complete control over the team and project progress
  • Reliable team
  • Suitable for long-term projects with undefined and changeable requirements
  • Flexible project scope and tasks flexibility
  • Dedicated team has a deep understanding of the project and business goals

Drawbacks:

  • Inefficient for short-term cooperation
  • Expensive compared to Fixed Price and Time & Material methods
  • Time expenditure: team management requires time and effort
  • Management costs: high responsibility for controlling processes and growth policy

 

time-and-material-vs-fixed-price-vs-dedicated-team-pricing-models-comparisonSo what is the conclusion?

As you can see, each one of the described software product development pricing models has its pros and cons. Choosing the best possible approach fully depends on the specifics of your project. At Vakoms, we successfully deploy all three models and deliver the dream product to clients. So feel free to contact us, receive a free consultation and get your idea brought to life.