Pricing models in software development
The pricing model offered for your project agreement depends on many factors, but it ultimately comes down to defining the project scope. For smaller projects or startups, the requirements might be predictable enough to give you a precise estimate. However, for larger, innovative projects, there can be much more uncertainty, so non-fixed pricing models might be proposed. Choosing the right pricing model for working with a software house is a crucial decision that must be carefully thought through, especially considering that software development is a unique service—not a repeatable product. The two most common pricing models are "Fixed Cost" and "Time and Materials." Let’s explore these in more detail.
Fixed cost pricing model
In this model you are asking software house for one price (as precise as possible) for exactly defined scope of work. Plan can also clearly state what are the milestones and expected release dates for each milestone and ordered items. With that information software house will proceed to start the estimation process to provide fixed pricing for ordered work. Note, that software house will need to verify during the process if order of items is proper, if there are no missing technical elements, if elements are described well enough and if expected dates are actually realistic. Sometimes changes proposed by software house will be substantial, especially if you are not familiar with IT project management.
When fixed cost assesment will be beneficial for you:
- Small projects or websites with predictable and manageable functionality.
- Budget-conscious projects that will need minimal maintenance or updates post-release.
- Projects built on established platforms (e.g., WordPress) that are straightforward to implement.
- Initiatives with pre-defined, UX-tested user scenarios and graphic design.
- Extremely pre-defined or smaller software solutions.
Advantages of fixed price model are:
- You know the project’s cost and timeline from the outset, making it easier to budget and plan.
- Minimal Client Involvement. Once requirements are set, the software house can proceed with limited need for further input.
- A well-defined scope helps avoid deviations and keeps the project focused.
- With a clear contract, administrative and budgeting needs are simplified.
- You know price and time for project from the very beginning. But it might be misleading, because you know time and price for project as it is defined and it lacks flexibility if anything to project requirement changes
Disadvantages of fixed price model are:
- Minimal margin for adjustments, testing, or scope modifications during development.
- No scope for additional functionalitie. Any added features, even those that make sense mid-project, would require renegotiation.
- Estimating precise timelines and costs is challenging, and there's a risk of underestimating complexities.
- No margin for tasks that by definition are badly defined.
- Possible problems with estimation processes. There is also some uncertanity, that need time and money margin - and someone needs to pay for that margin.
- Lack of long term perspective (for example, what about support and development after release?). Also, software house that is presented only with short-term goals cannot propose better solutions if possible, while they could if they knew long-term goals
- Problem with defining “proper” quality level of the end product. You can overcome it by defining scope and methodologies of tests, but you are constrained by test definitions.
- Lack of flexibility limits opportunities to adopt emerging technologies or methodologies that could improve the outcome.
Time and Materials pricing model
The Time and Materials (T&M) model treats the software house as a potential medium- or long-term partner in product development and maintenance. While you can change providers later, a close, ongoing relationship can improve efficiency and understanding, with both sides focusing not just on "task delivery" but on "building the best product for end users."
There are many ways to describe business idea, but "Why, How, What" is one of the easiest. It is important for team to understand background of the project and this method helps with it. For "Why How What" approach you have to specify at the very beginning:
- WHY you want to develop your product (industry/business specification, problem you are solving).
- HOW you want to achieve your business goals (how you want to solve issue, how you want to scale etc.) .
- WHAT is your desired technology (web or mobile app , custom software solution, certain technology/coding language etc).
This information is necessary for software house to help you create a proper plan for your product development using our experience on the software development market. Another simple yet effective methods of describing business are Lean Canvas and Business Model Canvas. Once software house understands your needs (or even better - your end users needs) developers can start building either the prototype or MVP (minimum viable product) version of your product by applying iterative frameworks such as Scrum or KanBan.
You’ll become the Product Owner (or delegate this role while retaining a Stakeholder role), staying in close contact with the development team. This structure enables you to:
- Adjust project scope and direction at almost any stage.
- Regularly review progress, providing feedback to ensure alignment with end-user expectations.
- Continuously assess the product’s current state, making necessary changes as required.
Ultimately, you will be charged only for:
- Hours spent by team members on your product/project development (TIME)
- All necessary technology costs connected to developing your product in certain (accepted by You) direction (MATERIALS)
Notice lack of margin. It is not needed here, but let's be fair - it's not because there is no risk. Although it is reduced, because developers only do things on the go that are most important at the very moment. Also it is worth noting, that testing aspect can be changed on the go, adjusted to current users behavior or even different for respective parts of the system.
When Time and Materials method of pricing will be beneficial for you:
- Development of complex products and solutions that are now in early stage but are expected to evolve in long term.
- Products that have to be continuously developed and maintained.
- Startups of high uncertanity of how to actually solve a problem or what approach would be best for users.
Advantages of Time and Materials model:
- Extremely low time-to-market due to early MVP release which enables gathering user feedback.
- Agile frameworks allow easy modifications in response to feedback or new discoveries.
- Continuous testing and refinement improve the product’s final quality.
- Agile iterations allow for user-centric adjustments that directly address evolving requirements.
- Costs are directly linked to time and resources spent, offering transparency and value alignment.
- Agile frameworks will give you chance to gather feedback from end users and easily adjust scale, scope and direction of your product development.
- Highest quality of end product due to continuous improvements.
Disadvantages of Time and Materials model:
- Requires more frequent client involvement to stay on course.
- Relies on a strong, trust-based relationship with the software house.
- The end cost can vary, but may be mitigated through a subscription model for predictable budgeting.
- Without clear milestones, there’s a risk of expanding requirements without added resources.
- Agile development requires familiarity with iterative planning, which can be challenging for newcomers.
Other pricing models - Hybrid pricing
You can encounter other pricing models, but essentially they will originate either from Fixed price or Time and materials. Especially interesting might be for you to find something in between those two - in such case you can get a fixed price, but provided in certain pricing range. Such approach is often used by us especially on early stage, and ensures that both parties understand more-or-less project scope and goal.
When hybrid model will be beneficial for you:
- You have general idea for the project but you don't know the details.
- You’re unsure if elements are missing from your initial plan.
- You want expert input on technical aspects that you’re unfamiliar with.
- You aim to validate that the software house understands the project’s vision and objectives.
Advantages of hybrid model will be:
- You can get early estimate of the project size without describing every detail of the project.
- It helps to identify if there are any technologically pain-points.
- You can find points that are "nice to have" but "for that price can be postponed after MVP" which reduces your initial launch cost.
Disadvantages of hybrid model:
- Requires preliminary sessions to refine the scope and pricing range.
- Provides only a price range rather than a fixed figure.
Importance of Project Business Workshops
As you can see it is quite a big of importance to select proper pricing approach, and main issue for seleting one of those is uncertanity. Of course, there are ways to reduce uncertanity, and one of those is workshops. Such workshops are meetings with developers so both you and dev team can better understand what software is about and what issues can you expect on the go. You can use our expertise to verify idea against our technical and business knowledge and test out if like communicating with us. This is beneficial for all sides, because:
- Having workshops at the begginning is essetially a low-cost pre-start for your SaaS business.
- All materials (like product goal, view prototypes, database structure etc) are yours to keep:
- If you don't like working with certain software house, you can take workshop results and move to another software house.
- You can reduce risk if at the workshop level SaaS idea is proven to be non-deliverable for any business or strategic reason.
- You can use such materials to get approval for more funding.
- You get better understanding on technological boundaries of the project.
- Clarity on the technological and business aspects of the project.
- Opportunity to establish rapport and test communication compatibility.
How do I start with project then?
First o all, there was a lot of talking about budgeting - if you would like to start working with us, we would love to know your SaaS budget. Providing estimated budget for the project helps a lot with assesment and with selecting proper resources to complete project.
Just contact us using contact form below and we will arrange meeting to discuss your project further. Also, if you strive for more knowledge about product ownership, project management or agile methodologies, you should certainly see other articles because there is quite a bit of knowledge in there and you should always look for more knowledge. Hope to hear from you soon and turn new idea into solution together!
