How to price software development: the comparison of 5 models

Software development is more than just a code. It is much more than a few programmers working on one big task. It involves a whole team of people, each of whom, like a gear in a machine, takes their place and becomes indispensable. 

Software development pricing models help to adjust the work of this entire team in a way that would be convenient to the customer. Development pricing is described in the contract and it should be approached with special attention. 

In this article, we will talk about the five most popular pricing models, and briefly discuss the difference between them and their convenience for different types of companies.

The first model: fixed price 

This pricing model fixes deadlines, and project estimates of time are adjusted to the financial resources and pricing the customer is counting on. That is, all payments under this model are already prescribed, and paid by you, for each stage of project development. Therefore, specifications remain unchanged throughout the project. And should you need to change them, it will always entail additional costs and bureaucratic problems with making changes to the contract. 

Pros: 

• you know for sure that the project deadlines won't be postponed;
• full certainty: there will be no unforeseen costs, it is almost impossible to go over budget;
• you have a clearly defined set of works that will be done without any changes;
• detailed project specifications allow you to be sure of the end result.

Cons: 

• the team may be less enthusiastic, which will affect the development quality because the main indicator of effectiveness in this model is compliance with deadlines and budget scope; 
• if specifications are altered, the time will be spent revising deadlines and charges which will slow down the development process;
• your project may lose flexibility, which results in a risk of getting a product that doesn't fit into the potential targeting.

So, with this pricing model, you are likely to get exactly the software you wanted, the functionality of which is stated in the specifications. However, by depriving your team of flexibility, you risk losing their best ideas and it is not guaranteed that such software will meet the needs and goals of your business. 

So yes, it will be the implementation of your idea, but not the best of the best solution you could've got. 

To what projects would be suited:

• small businesses with a small project to implement;
• companies that already do have software requirements specifications (SRS);
• companies who are not planning to add, remove or somehow change the SRS;
• companies that need to hand the development to the team and don’t mind having minimal control over it.

The second model: FFF (FIxed time, Fix budget, Flex-scope) 

A model that allows you to establish three main components of any development: budget, time, and quality. These three fragments remain unchanged according to this pricing methodology, while the scope of work and the list of tasks can change in the development process. This approach allows you to prioritize your tasks and plan the pricing of your future project better without any unplanned expenses.

Pros:

• allows to estimate the complexity of the development beforehand and set the budget;
• helps you get your work done by setting precise deadlines for the milestones and entire project; 
• fixed pricing means that the customer has no need to keep track of the amount of work;
• gives flexibility by keeping the works that remain flexible and variable in this process.

Cons:

• can also affect the team's commitment, as deadlines and pricing are established;
• it's almost impossible to accurately estimate the scope of work, which may affect the quality of the software due to the strict deadlines;
• can affect the team' performance because the model puts its members under  constant pressure (deadlines, quality control, no additional bonuses). 

It is not that this model has many disadvantages, rather it has many risks. You as the customer, have to rely only on the trustworthiness of your technical partner because the quality checks are not motivated by paychecks. Nevertheless, if you are lucky enough to find a reliable technical partner, you will get quality software on time and with a well-defined initial budget.

To what projects would be suited: 

• to projects that require a bare minimum of flexibility but need to establish deadlines right away;
• to small and not layered projects; 
• to projects in which prioritizing certain tasks is crucial;
• companies who don’t seek to control everything in the development process.  

The third model: Time and Materials (T&M)

This model is based on the working hours spent on the project and the cost of all the resources associated with development. This model is more flexible because, despite the fact that the deadlines and specifications are established, you do not pay for the development of the entire project at once. You pay for a set period of time, intervals (once a month/quarter). And it will be much easier to change something in the process, in the specifications, or in other elements of development that are important to you. Since the price does not regulate the entire project, you won't need to recount pricing again. The changes will be counted at the next payment interval. 

This model has a lot of similarities with the milestone pricing model. Its main difference is that you do not pay intervals, but after a certain block of work - the milestone - has been completed. Such models are often used in agile methodologies. 

Pros: 

• more contro: you can check the work before each next payment;
• space for creativity and initiative, since the development is no longer tied to strict deadlines; 
• time to market is shorter because of the model’s flexibility. 

Cons: 

• requires your constant involvement in the development process for approval of the projects' details;
• there is a risk to spend more than is planned.

This model is more flexible, so you get more control over the development and specifications. You are working directly with the team and controlling their work. But it has its risks; you may be pushed to put development on hold because it became difficult to fit the pricing into the initial budget. So, you will get software that meets your target and fits the needs of your audience, but its development will take longer and can possibly be more expensive. 

To what projects would be suited:

• a project that is constantly changing, evolving, or scaling; 
• a complex long-term project, in which it is difficult to foresee clearly the full scope of work;
• companies, that need to be able to adjust the pricing and the development process.

The fourth model: Dedicated team

This pricing model means that you can hire your own team of developers and other specialists, and pay them according to the time they spend on the project. This model can be roughly divided into three models that contribute to it: 

• offsite: you hire an employee who works with you on the premises of a software development  company, often in another country; 
• onsite: you hire an employee who works with you on your company premises;
• outstaff: you hire an employee not from a development company, but from an outstaff provider; they work with you either at the provider's premises or at your company's premises. 

With this pricing model, you have full control over the development but you have to be the manager of this process. 

Pros:

• the possibility to fully control the team; hire more or fewer people; 
• increased control over the development, nothing happens without your approval; 
• flexibility and the chance to save through reducing the team composition if you need to. 

Cons: 

• the need to control all processes and form your team; 
• hiring a team is a time-consuming process that can affect the speed of project development;
• there is a risk of losing teamwork smoothness.

In this model, you pay not only a salary to your employee; you also pay the administrative tax of the provider you choose to work with. 

To what projects would be suited:

• to a long-term project, working on which the team can grow and team up for better teamwork;
• to a project that requires constant control over development / a businessman with a strong technical background;
• to projects with a small budget, where the possibility to control the team and be able to hire or fire people is important.

The fifth model: Milestone based model

This pricing model allows you to evaluate and pay for project work after each milestone. A certain period of work is priced separately, allowing you to break the development into sprints and control each step. This way, even the largest projects can be implemented faster and better. 

Pros: 

• you pay for the result, the budget and pricing are not defined, and before making a payment you check the quality of work and its compliance with your requirements;
• control over the development is achieved through the possibility of checking every stage of work and assessing its quality; 
• the motivation for the team is higher due to the fact that payment is not a one-time fee; so the higher the quality of their work is, the more likely they're not to lose the client and receive payment in the future. 

Cons:

• there is always a risk of going out of the budget because of the deadlines and work scope's flexibility;
• flexible deadlines do not give as much clarity as fixed deadlines, so they can shift.

With the milestone pricing model, you have the ability to break up a large project into many smaller ones. This allows you to segment development. It doesn't require you to pay out a large sum of money right away. it gives you the ability to pause development when or if needed. 

However, there is always a risk of pulling the pricing out of the limits, as well as failing to meet your desired deadlines.     

To what project would be suited:

• for complex, large, multi-layered projects;
• for entrepreneurs who already have established contact with developers;
• for projects that set priority not in deadlines, but in the highest quality of the development.  

So, in order to find the right pricing model, you need to assess your project on the following parameters: 

1. The team: how many people you need to implement the project. 
2. The complexity and length: how many time and resources you need for the project. 
3. The budget. 
4. The level of your impact: how much control over the development you need and how flexible the development must be. 

Some companies, like MassMedia Group, are willing to work with clients on any pricing model they are comfortable with. Often it is up to the client to choose the pricing model, but a reliable technical partner will help determine the one that’ll be best suited for you to work with.
Based on the specifications of your business, a reliable IT partner will help you build the most effective financial communication via a pricing model. This, in turn, will unlock the potential of development to its maximum.