It's essential to choose the pricing model and contractor interaction approach that best suits the project's requirements at an early stage when developing web applications and other IT products. Agile, for instance, is suitable for startups due to its flexibility, and Dedicated Team, which includes employee pay and administrative expenditures in the pricing, is suitable for large businesses.
We have put together the most important benefits and disadvantages of various models that will explain to you the most common pricing models to make it easier for you to choose the best approach for your software project. You will find out how to choose a model which would be the best for your industry by understanding its advantages and drawbacks.
Project on Time and Material
In a time and material project (T&M), the team's time and the materials used to construct the project are used to determine the pricing. It is most commonly utilized when it is difficult to estimate the precise cost of the final product. T&M is suitable for short-term, and medium-term tasks carried out by a small team (1-3 specialists).
T&M model advantages:
Effectiveness. The customer is flexible and can make quick changes to the work schedule or specifications for the finished product. Modern agile techniques like Scrum and Result work well with T&M. the capacity to connect with the team, continually check on the status of the job, and view the outcome at all stages.
Difficulties with the T&M model
Budget. Budget estimates are not always feasible in advance. Everything depends on how accurate the instructions are or how they alter over the workday;
Communications. With this strategy, the software development firm might have to interact with the customer frequently. On the other hand, it will raise the level of the final product's quality.
Dedicated development teams approach means that partners define a pricing for a particular team that is being established based on the monthly salaries of all team members as well as additional administrative expenses. This team ensures all the software development tasks.
You can create a team using the Dedicated Team approach while taking into account the competence of each team member and the project's budget. Ideal for long projects with unclear specifications or sizable internal initiatives of the client's business, if he lacks sufficient qualified staff.
This team can be independently managed by the customer, while the executing firm is responsible for handling the administrative tasks.
Benefits of the Dedicated Team approach include:
Control. The customer has complete power to supervise and manage the team, as well as manage each member's task;
Professionalism. Selecting developers based on their level of expertise and experience in a given sector on an individual basis;
Optimized costs. The remote team manages deadlines and, if required, takes care of further hiring.
Dedicated Team model drawbacks:
Instructions are always required. A remote team can build a project based on their tastes when given insufficient directions, which is not always a desirable thing. Experiments, however, don't always fully justify themselves.
Fixed Price model
Fixed Price is an approach where a fixed price is set for a company's specific services. Fixed pricing is superior to alternative financial interaction models for short-term ventures. For instance, a client might decide to collaborate with a new partner and, to reduce risks, start a smaller pilot project that will take a few months to complete. However, the approach is also suitable for long-term projects.
But unlike the T&M and Dedicated Team concepts, it is crucial to have all project-related documentation and instructions, and following the plan's directions strictly is required in a Fixed Price context. Only when you are convinced that the product needs won't change in the future should you adopt this strategy. Additionally, you will be forced to sacrifice functionality to meet deadlines in the case of force majeure.
Benefits of the fixed price concept
Accuracy. You can acquire exactly what you need when instructions and requirements are well-crafted;
Timing. The timeline and the development process are discussed beforehand to prevent deadline breaches.
Fixed Price model's drawbacks
Risks. It becomes challenging to manage the risks connected to the development of new tasks, frequent revisions, and additions to existing ones with such a model. Because of this, it is preferable to utilize the hourly rate technique and account for the time needed to complete the project, for instance, when designing a website or application architecture;
Control. Since the contractor manages the project, it is challenging for the client to determine where he is in the process and how well he meets the standards.
Flexibility. Price may not appeal to all customers, which makes it challenging to focus on different segments of customers. The flexibility of dealing with clients is difficult with a fixed price.
Agile value is a cutting-edge, adaptable pricing strategy that is based on the company's costs, changes to those costs during work, how the client perceives the price, and rival pricing. It enables close collaboration between the client and the team of the contractor. Usually, the work is split up into little sprints that are finished quickly.
Because a constant stream of significant tasks is generated based on the actual requirements of the client, agile value is suitable for both short-term and long-term projects. All prior approaches are different from this one.
Benefits of the Agile value model include:
Efficiency. You may successfully modify a project at any point thanks to its flexibility, which allows you to receive exactly what you need from the contractor;
Control. The client immediately participates in the creation of the product, assigns tasks, and so fully directs and supervises the working process;
Transparency. After each sprint, the outcome is shown.
Drawbacks to the Agile value model
Time. The customer and the execution team take some time to accept any suggestions and modifications.
Pay as you go (PAYG) is a method of making a payment for a specific service. Municipal institutions are a good example of where this system is effective: you only get paid for the electricity you use after using a set amount in a certain month.
PAYG uses just a few cloud storage providers in the IT industry. According to the deal, a client will only be charged for 1TB of space if he utilizes that amount of space each month. As a result, the technique is only suitable for businesses that provide a paid service, not those that provide application development services or marketing strategy implementation.
Benefits of the PAYG approach include:
Pricing. Customers just pay for the services they utilize, not according to the tariff, hence the service is lucrative;
Efficiency. Resources from the company are used as effectively as possible.
Drawbacks to the PAYG approach
Limitation. The approach is only appropriate for product IT companies where it is simple to calculate the cost of a production unit.
Hourly payment is the hourly rate. Hourly rates are appropriate for businesses working on small, quick projects that only require one expert to complete. These include design studios for UX and UI, app development, copywriting, and other related fields.
The method is characterized by this cooperative algorithm: the customer specifies the work, sets the deadline, and the performer estimates the number of hours needed to accomplish the project. This is used to determine the final product's pricing.
Benefits of the hourly rate approach:
Profitability. One expert's labor is less expensive than a team's services;
Simplicity. The contractor can easily determine the cost of the completed piece.
Drawbacks to the hourly rate approach:
Cheat. To increase the price, the contractor will occasionally add more hours to the cost calculation. An agreed-upon price is preferable in this respect.
Disputes. The debate about why the creation of the application will take a month rather than two weeks will take a long time.
How to choose the best approach for your IT project?
Before choosing the type of team and the cost, you need first consider the complexity of your software development project and the amount of time needed to accomplish it.
The details of the activity field, the number of software development experts involved in the project, their level of knowledge, and the degree of the company's market credibility should all be considered when choosing the best collaborative approach.