According to a recent study by Deloitte, 70% of companies are choosing to outsource their software development projects. The leading driver behind this decision is to save money.
If you aim to reduce costs and gain better ROI, you may be tempted to go with a custom software development company that offers the lowest bid. Nevertheless, just because the bid is low does not mean the contract pricing model or service agreement is right for you, your project, or your overall business goals.
To determine how to get the best software development pricing that meets your needs and gives you significant advantages in the market, you need to understand the following concepts:
- Why software development agencies use different pricing models
- Differences between available pricing models
- Pros and cons of each model
- How to choose the best pricing model for your needs
Demystifying Why Software Development Agencies Use Pricing Models
Software development agencies use different pricing models for strategic purposes. Their strategies can be internal or operational based, such as choosing projects and pricing models to match the skills resources of their staff. These agencies may also choose their pricing models to better accommodate the needs of their ideal customer profile.
For example, some software development companies, often referred to in the industry as “dev shops,” choose to serve customers who just need something basic built. The software doesn’t have a lot of bells or whistles and only solves very common business problems.
Most of these dev shops use cheaper, overseas labor to attract customers with extremely low rates, but you have to understand what you’re paying for. You are only paying to have your product built to spec. Nothing more.
These dev shops are build-to-order businesses, not consulting agencies that provide business guidance or technology recommendations. When choosing a custom software development company, you must know if the scope of work you need done is build-to-order or more complex. That will help you find not only the right partner but also the right pricing model.
Defining Software Development Pricing Models
The following includes the most common software development pricing models currently available:
Pros and Cons of Software Development Pricing Models
If budget is your main concern, you may look at these pricing models and think that the cheapest and most straight-forward ones are your best options. But before you make that decision, you should consider the pros and cons of each model.
Fixed Price or Fixed Bid
Time and Materials (T&M)
Mixed Pricing or Hybrid Pricing
How to Choose the Best Software Development Pricing Model
The reason there are so many different software development pricing models is to match the variety of customer needs. Therefore, the best pricing model will always be the one that matches your organization’s immediate needs.
That said, there are some guidelines you can follow to determine which pricing model would work better for your needs as compared to other models.
Size and Complexity of Your Project
Most software development companies rank projects as either small, medium, or large. Smaller projects usually take less than three months to complete, they include fewer deliverables, and the software solution delivered is not very complex.
Medium-sized projects can be completed in 3-6 months, are somewhat more complex, involve several customer stakeholders, and there is often ambiguity concerning the full scope of the project.
Larger projects include multiple deliverables as well as subprojects. Projects of this size often impact multiple services and departments within an organization, and they typically take anywhere from 6-24 months to complete.
Based purely on the size and complexity level of the project, here are some general guidelines on which pricing models work best:
Timeline to Get Product to Market
In the previous section, we verified how long software development projects take in terms of months based on size and complexity. But, how do you know what constitutes a small project versus a medium-sized one?
If you don’t have a background in technology, you have no context for what developers quantify as small, medium, or large, let alone complex. That’s why most software development companies start every project with a discovery process.
During discovery, software developers and product owners can determine which technology solutions are best suited for solving your business problems or upgrading your systems. From collecting these details, they can create a basic scope of work, propose a budget, and build a timeline for how long it will take to complete the project.
Recognize that completing the work includes a multistep process. Most projects are not something that can be done over the weekend. Software development requires designing what the product or service will look like, determining the best way for it to function, doing the actual development and technical coding, testing the product, and completing all additional prelaunch stages before it goes live.
Software developers cannot complete your build overnight, but they also recognize you have a deadline. If the deadline is feasible, they will try to make it happen, or they will negotiate project needs to deliver a more bare-bones version, such as a minimum viable product (MVP). The MVP may not have everything you want, but if you have a shorter deadline that can’t be missed, it may be your best option.
To determine which software development pricing model works best for projects based on a timeline, the general rule is as follows:
Timelines Less Than 3 Months:
- Fixed Price
- Mixed/Hybrid Pricing
- Managed Services
Timelines Greater Than 3 Months:
- Mixed/Hybrid Pricing
- Managed Services
- Dedicated Team
- Cost Plus
To give you even more context on how long your project might take, look at this graph below for the average amount of time it takes to build commonly requested custom software projects:
You can learn more about the difference between out-of-the-box and custom software here.
AltSource’s Pricing Model Promotes Partnership and Transparency
While there are several software development pricing models out there, most providers only offer one or two options based on their business strategy and ideal customer persona.
For example, at AltSource, we value developing long-term business partnerships in which we can help customers build their technology roadmap so that they can continue to grow and scale. To match our business needs and style, using the Time and Materials (T&M) model has proven most effective, as it allows for full transparency and relationship-building.
Likewise, T&M enables our team to be more innovative for our clients. Often, clients come to us with medium to large-size projects that are usually less defined. By leveraging a T&M pricing model, we can better provide more thoughtful, long-term consulting to identify the right solutions for our client’s present concerns as well as their future needs and goals.
For instance, when we worked with Northwest Generics, a supplier of generic prescription drugs to more than 180 pharmacies throughout the Western United States, we knew that they needed a business partner like us with the skills necessary to identify their problems and build them the right solution to align with their current needs and future goals.
During discovery, we took a deep dive into their business to identify the problems they were facing. After the discovery process and interviewing their team members, we learned that their legacy system was creating too many roadblocks and that many of their business processes were slowing them down.
Thanks to our way of connecting with customers, our experts leveraged their industry knowledge so that we could build them a point-of-service pharmaceutical management system. Find out more details here.
If you still have questions about different pricing models or how the relationship between customers and customized software development agencies works, please reach out to our team: firstname.lastname@example.org