Software Development Pricing Models

When hiring an experienced team of developers to build your custom software, there is one more vital thing to consider, and this is the pricing models that this company provides. The pricing model is one of the contracts that are essential to be signed with the hired team and it contains information about development activities, the approximate duration of cooperation, overall product estimation and defines what the client pays for.

There are eight main pricing models popular on the software market. The selection of a suitable one for your project depends on a particular list of features like complexity, duration, budget flexibility, etc. 

Keep reading to find out the specialties of each of these pricing models and what projects they suit the best.

Pricing models and their cases of use 

We bring the list of the most widespread pricing models for building software projects to your attention. There is no good or bad choice of pricing contracts as it depends on the type of solution you want to create. These contracts also have their peculiarities, advantages, and disadvantages. So we recommend you to have a look at the pricing models` descriptions to find out which one would perfectly suit your project. 

Time & Material Model

Time & Material pricing model is all about flexibility. It implies open-number hours of development in order to perform all set goals and requirements of the project. Consequently, there is no exact amount of required time to develop a particular product and a client agrees to pay for actually spent time and used materials. To mention the key benefits of the T&M contract:

• high flexibility that lets to change scope during the development process;
• a client pays only for the actual number of hours;
• transparent and fully tracked by a client.

However, this pricing model counts several challenging sides like:

• constant client involvement into development stages;
• a huge possibility of different initial and final estimations;
• duration of the development.

The T&M pricing model is suitable for software projects of diverse sizes and levels of complexity that usually last up to 6 months. This contract is also applied when the project does not have clearly-defined specifications and the scope will be expanded for sure due to the absence of any fixed payments. 

Dedicated Team Model

A dedicated team pricing model implies a long-term partnership between a client and a service provider. Mostly the development process and communication are held online but it does not influence the quality of the future solution. The model is flexible and suits different sizes of projects as a client can change the requirements during the development process. A dedicated team model means a client needs to pay sums for particular services that were performed during one month. The number is variable as it depends on the tasks that a team has done. This model is an excellent choice when your in-house team of developers do not have enough experience in building your type of software solution. Among the positive sides are:

• based on long-term and reliable cooperation even after product release;
• full-fledged involvement of the team particularly in your project;
• constant monitoring of the development stages.

Nevertheless, this pricing model counts several gaps like:

• probability of reducing team involvement;
• low commitment in business productivity and efficiency.

The dedicated team model is used for the developing solution of medium and high levels of complexity that usually takes more than 6 months and involves a team of more than three specialists that influence the final estimation. Thus, the scope is more identified than in the Time & Material pricing model but still is expected to be changed during the process. 

Hybrid Model

The title of this pricing model speaks for itself. It is a combination of several pricing models Time & Material and Fixed Price considering their positive sides. This is a great variant when the project’s requirements are not transparent and complete. This pricing model implies estimation due to the T & M model to provide a fixed and accurate final sum. To highlight the beneficial features:

• optimized budget and correct final estimation;
• a client can choose different types of payments – hourly or single payment for the whole project.

However, this pricing combination is not always a good idea because the client can not track the expensed resources.

What hybrid model is a good choice for? The hybrid model suits large software projects that take a long period of time. Usually, this contract requires initial input in the product development that will need updates and consequently more investment with time.

Managed Services Model

Managed services are the most actual contract for business owners who do not have enough time to maintain the company tech sphere. Thus, all services are based, managed, and delivered by the service provider. A client has to pay for a maintenance subscription as the services are at a fixed price. As advantages of this contract, we would like to mark:

• it lets business owners turn all effort to core business needs;
• the service provider independently makes a decision, for example, where and when investing to;
• this contract also aims to boost business productivity as the payments depend on the level of service provider efficiency.

Likewise, managed services model maintain several imperfections among which are:

• due to the possibility of having completely different cultures between a client and a service provider, there is a risk of misunderstandings based in that regard;
• the project’s scope and peculiarities can reveal unclear and inaccurate information for the service providers that can lead to confusion.

This pricing model is appropriate when the product has a fixed and well-defined scope and when a client agrees with service provider processes.

Fixed Price Model

A fixed price model is relevant for projects with fixed scope and budget as a client has to pay one single time for the entire development process. This pricing model makes impossible scope and requirements changes as it will go beyond the budget. To make this variant appropriate, the project should not contain lots of specifications as the more details it has the more complex accurate estimation will be. Among the key advantages of fixed price contract are:

• defining detailed requirements for the beginning of the development in order to remain within the initial budget;
• considering all business needs and ensuring in maintaining the project within the scope of the estimation;
• boosts the productivity of service providers as the final product should respond to client’s expectations about functionality and payment.

Being unable to widen the product requirements during the development leads to:

• difficulties with estimation comparison among different service providers;
• service providers are at high risk of going beyond the fixed budget.

This pricing contract is a great choice only for the project with detailed requirements, transparent documentation, with no possibility of scope changes. It is clear that this model is not suitable for large projects, rather for medium and small-sized solutions. Sometimes the absence of scope changes can lead to some risks but choosing this contract client agrees to face these risks. 

Value-based Model

Value-based or transaction-based pricing model implies dividing the development process into units or stages and defining the number of transactions for finishing a particular unit. Thus, a client and a service provider should properly define the project specifications, separate them into units and provide a transparent estimation. To avoid confusion, the number and amounts of transactions should be discussed and agreed upon with all involved parties. Speaking about its benefits, we would like to mention:

• clear definition of business processes and solution goals
• make the development process more productive

On the contrary, this pricing model suit far not all types of software solutions and has a range of cons:

• there is a probability of discrepancy of the project to client expectations
• the development is not fully transparent

As we have mentioned above, this pricing model is suitable for development that can be divided into separate units and transactions.

Outcome-based Model

This contract model aims to guarantee the boost of the company’s efficiency with the custom software solution. It is directed on the outcome the company will get like the growth of the general revenue, workflows optimization, and automation, etc. Otherwise, a service provider will not get the payment if the solution result does not correspond to client expectations as this pricing model implies two pricing approaches – fixed price per milestone or percentage from company earnings. Among the main benefits of the outcome-based pricing model are:

• high involvement in the project to release a profitable solution;
• cost savings due to the productivity of the development.

However, a lack of transparency in the development process can lead to misunderstandings between a client and a service provider. So it is important for your business goals to align with service provider goals that lead to a successful output. 

Price per Story Model

This pricing model is dealing with agile software development. The project`s specifications are divided into user stories each of which has an estimation. A user story is a detailed description of particular product features where a client can find information about the feature flow, required technologies, developers, hours of work, and assessment. It is a perfect choice for long-term agile software projects as the scope, business needs and estimation are variable. 

We insist on checking out the presentations of Altamira pricing models with detailed descriptions and examples of projects where each of them can be applied. Just enter your email to get access!

Things to consider when choosing a pricing model

The choice of pricing model is based on the types of software solution the client wants to build. For example, if a client has a clear picture of the future product, understands the business goals and requirements, then the choice is obvious – fixed price model. Nevertheless, there is a wide range of project details that should be considered before signing the billing contract. Some of the vital features we highlighted in the list below to help you keep a balance between your expectations, available budget, and product functionality.

Pricing strategy

To reach the right pricing model choice, there is a particular list of features that are vital to consider among which are:

• detect client`s value and project`s priorities to keep up with the competitors
• make an approximate estimation of the product 
• make sure that the product` requirements correspond to the client’s expectations

Usually, discussion with clients is not enough as they can not cover all the required features for their project. We recommend holding marketing research in the industry to analyze the competitors and most widespread features of this type of solution. 

Project scalability

The key option that helps you to define a suitable pricing model is the project’s scope. Depending on your budget and business needs, the product’s scope can be fixed from the beginning of the development during the discovery stage. Also, the scope can be variable and changed during the development process in order to correspond to your expectations and product requirements. 

Project size and duration

Depending on the size of the future project and the approximate duration of its development, experienced specialists advise you on what pricing model is the best choice for your case. Large projects usually demand scope and budget changes consequently this client needs a suitable pricing contract that will let them perform these changes with no harm to the development process.

Project flexibility

During the development process, a client can be asked if the requirements can be changed or expanded. Of course, it will influence the final sum as well as product quality. All these possible risks should be discussed before choosing a pricing model to inform clients about the positive and negative sides of flexible pricing contracts. 

How to choose and hire a team of developers?

There is no necessity to choose the software development company that applies all possible pricing models into building the solutions. An experienced team of developers will easily select the required pricing contracts considering the business industry peculiarities, the company goals, and product requirements. The modern market of software development companies is really huge and we would like to mark several vital tips that will help you recognize if the company will fit your expectations. They basically are:

• check the website and available portfolio, thus, you may find out about the company’s functional and industry expertise;
• look for feedbacks from their clients, for example, on Clutch or Good Firms, usually, these reviews are fair;
• make sure the company holds transparent communication, documentation package, and development process; 
• make sure that your business goals align with the company goals to avoid misunderstandings.

Altamira is a reliable team of developers that has vast experience in building custom software solutions for all business industries. We know how to identify the solution`s priorities by providing marketing research in the industry and discussing the key business goals. Entrusting your project to our team will be one of the best business decisions you have ever made.

FAQ

To end up

What we know for sure is that any type of software project suits at least one of the counted above pricing models. Everything depends on a particular range of requirements, and we know how important it is to clearly define the product priorities from the very beginning. A transparent list of the project`s goals and functionality reduces the possibility of risks and helps to avoid misunderstandings with the client.

We care about the final result of the solution that we develop and make a great effort to correspond to our client’s expectations. At our disposal there four main pricing models are Time & Material, Dedicated Team, Managed Services, and Hybrid. Here at Altamira, we know which one is the most appropriate choice for your software solution.