How to choose the right pricing model for software outsourcing projects

Selecting a software development pricing model may seem a complex process influenced by many factors. With an experienced team and strong management, choosing a suitable pricing model allows for cutting project costs and streamlining the development process.

IT services are priced in various ways that go beyond routine payment schedules. Here is a comparison of four software pricing models to help you with this challenging choice

Fixed-price model (FP)

In this model, the IT service provider and vendor sign an agreement where the budget, project terms, and payment schedule are agreed. In order to achieve the project goal and meet the budget, the contracting parties must clarify the project’s scope, business and technical requirements, milestones for deliverables, and the agreed-upon price in advance. The project team assumes the release date and adheres to a limited budget.?

The model is praised for such advantages as:?

• Predictability
• Minimal risks

Nonetheless, its stiffness brings the following drawback

• Lack of flexibility

Although this model is a bit outdated, it is perfect for relatively small projects with precise tasks, detailed specifications, unchanging requirements, and rigid deadlines. It’s not the option for medium or large projects when customers cannot provide sufficient documentation to evaluate the project in detail or have vague, unclear requirements. In that case, software development companies usually provide a Discovery phase service.

Also, the Fixed-price model is hard to implement in a pure form since adjustments are often made in software development. Every change in the project scope will be time-consuming since alterations should be added to the agreement after legal approval.

Time and material pricing model (T&M)

Considering this model, team members note the hours they allot to the project according to their rates together with additional expenses (i.e., materials) like SSL certificates, paid frameworks, fees to submit apps to the stores, etc.

Unlike fixed-price, the time and material pricing model is flexible and adaptable even to fast-changing conditions. It allows timely recalculation of the costs if requirements change. Customers have more opportunities to control the project's progress since they are free to promptly alter the scope of work.

The model includes benefits like:

• Enhanced flexibility
• Transparency
• Reduced risk of overpaying
• Agile development process

The main shortcoming is

• Ambiguous budgets and deadlines

This model is beneficial for businesses with long-lasting projects, changing requirements, and brand-new projects with variable scope and plans for improvement with new features in the future.

Mixed pricing model

The mixed model boasts the advantages of the fixed-price and T&M ones. Using this scheme is preferable when, on the one hand, you have a defined time frame to release the product, but on the other hand, the requirements are still ambiguous and unclear. It enables altering the project’s scope, managing extra costs, and providing regular revisions.?

This model implies that the budgets are accorded monthly with an agile approach to changes. The customer and the service provider agree on the scope of work, timelines, and costs before each month or iteration and can adjust them if required.

One of the most significant pluses of a mixed model is the flexibility to ramp up and down development teams. Customers can easily assign new members (more software engineers, QA specialists, UI/UX designers, etc.), empowering the project team if an acute necessity appears.?

Moreover, this model enables the parallel streams’ approach in software development when several teams simultaneously work on interconnected or different features/modules in order to speed up time-to-market and launch them simultaneously.?

Dedicated team pricing model (DT)

It implies hiring several full-time employees or a dedicated development team on a long-term basis. They handle only and exclusively the customer’s project.

Customers can either manage the teamwork themselves or engage a dedicated project manager to coordinate the team, supervise the operations, and resolve issues if required. The monthly fee for the dedicated team is usually fixed.

The DT is considered to be the most advantageous model for customers. It fosters the project development process and boosts efficiency since dedicated specialists fully concentrate only on the customer’s tasks and work as one united team. If a project manager is on the provider’s side, the customer can focus entirely on the core business without bothering about routine team management tasks.?

This model is highly appreciated because it facilitates establishing effective long-term partnerships, allowing dedicated teams to accumulate product and domain expertise,? find the best solutions faster, and proactively participate in product enhancement.

Summing up

All in all, there is no one-size-fits-all solution. Every single project is unique and requires an individual approach. If you hesitate to choose the pricing model that fully meets your needs, feel free to consult Innowise Group. Our vetted specialists will consider your project thoroughly and assist with the appropriate pricing model proceeding from the project's specifics.?

Innowise Group completed over 600 projects, bringing value to the customers and expanding development partnerships to another level. With our profound assistance, you will not face budget overruns since the pricing model will meet all the specific requirements.