Choosing a suitable software development pricing model is one of the key factors in project success, just like an experienced development team and strong project management. Pricing models in IT services go far beyond routine payment schedules. Your decision on the model will outline the cooperation, attitude to changes, and client involvement level.
To build a successful partnership, a pricing model should strike the right balance between your expectations on timeliness, quality, and cost, plus the development company’s prices and operational efficiency.
Today’s IT pricing models range from traditional fixed price, milestone, and time and material models to agile options like hiring a dedicated team and Software Development as a Service.
So, what does this mean for you?
A pricing model may be a good fit for one project yet turn another into a disaster. Read this guide to learn more about pricing models in software development, their strong and weak points, and their areas of application. By the time you’re done, you will know the right questions to ask when shopping around to find the best fit for your business.
The fixed cost software development pricing model assumes fixing technical and business requirements such as the scope of work, timelines, and payments. The major requirements for sticking to this model are well-defined project goals and thorough technical specifications. These serve as a base for a detailed backlog, help establish project specifics and assist in choosing the resources which will fit cost and delivery schedule expectations.
Once all the terms and conditions have been discussed and agreed upon, the costs and the functionalities set written into an agreement remain unchanged.
Pros and cons
The fixed-price model can offer a number of tangible benefits, among which are:
- Straightforward payments. Fixed-price contracts mean you can easily handle your financial planning since prices can rise only through contract variation or through changes.
- Clear delivery schedule. Fixed-price projects offer set completion dates and clear timelines on release dates. So you know exactly when you’ll receive the final product and can make plans accordingly (e.g., the launch of the marketing campaign).
- Predictability. The customer needn’t worry about the development process since all the details have been hashed out and specified in the agreement. This means the development team has a clear plan of action, and you know what kind of product you’re going to get.
- Minimized risks. In most cases, a fixed-price contract requires a prepayment. The client makes all further payments only after the software development company fulfills the requirements specified in the contract.
Yet, this old-school pricing model isn’t a bed of roses. Fixing the scope and price can lead to the following disadvantages:
- Long preparation time. The pre-co-operation stage and planning can take more time and effort since the dev team needs to make sure every feature and the logic behind it is clear prior to the development starting.
- Little to no flexibility. Any change or new feature must undergo the same process as the original project plan (i.e., terms and price negotiations plus the signing of additional agreements). This can prolong the time-to-market for the product.
- Overpaying. The final cost is often higher than that of other pricing models since the service provider will often price to cover possible risks associated with budget overruns.
- Less control over the process. Miscommunications between the development team and the product owner can result in building a product that doesn’t exactly meet the demands of the client. This may be the case in projects with a long timeline where the requirements weren’t clearly defined at the beginning, and the developers lacked feedback on their work along the way.
Despite all these drawbacks, there are still projects where the fixed-cost pricing model will be the perfect option.
When to use the fixed-price model
The fixed-price model is good for projects with a clear scope and a stable set of requirements. It’s a good choice if:
You have a small project with limited features and a short timeline (lasting less than two months)
You want to build a Minimum Viable Product (MVP) to validate the market demand
You have clear requirements with little to no chances of future changes in the project
You have a limited budget and strict deadlines
Yet, in reality, only a few projects can boast of having clearly defined technical requirements. It’s hard to foresee all the nuances at the beginning, which makes adjustments and alterations an indispensable part of building a successful software project.
Time and material pricing model
This software development pricing model assumes you pay for the time the development team spends on the project. On top of that, you also need to cover additional expenses (i.e., materials) like buying SSL certificates, using paid frameworks, fees to submit apps to the stores, and other associated costs.
The time and material model (T&M) can offer great scope and financial flexibility. Yet it doesn’t mean a lack of timelines or financial boundaries. In most cases, the development company estimates the time and expenses required to fulfill a certain scope of work. Still, you can easily add or remove functionality and play with scope and priorities to ensure the product meets the market demands and still fits your budget.
Pros and cons
Among the benefits the T&M model can offer are:
Flexibility. Using the time and material pricing model allows you to easily react to market changes and so adapt your product and make pivots (if necessary).
Transparency. Usually, developers use time and task trackers, so you can easily check how much time they spend implementing certain features and know exactly what you are paying for.
Quick start. There is no need to spend weeks preparing huge specification documents that might change during the development. Instead, you outline your priorities and start the development as soon as the contract is signed.
No overpaying. The time and the material model assumes you always pay for the actual time developers work on your project. There are no charges to cover for eventualities on their end.
Agile development process. The T&M model is a great fit for using agile methodologies like Scrum or Kanban, which let you make frequent reassessments and adapt plans.
Yet, this model has two major drawbacks:
Uncertainty. Changes to the scope can push back the final release date and impact the total budget.
Deep involvement. You, as a product owner, need to keep tabs on the development process, set priorities, and act quickly to respond to ever-changing market demands.
When to use the time and material model
The time and material software development pricing model works best when you don’t have a clear scope and want to be deeply involved in the development process. Choose it if:
- You want to follow agile methodologies
- You need to be flexible due to quickly changing requirements
- You don’t have strict deadlines
This doesn’t mean you go in blind. Just like in the fixed-price model, you start your cooperation with planning, but only for the upcoming week or two. So instead of determining and fixing requirements for the whole project, you start fast and can further adjust the scope and priorities as necessary.
Milestone pricing model
This is one of the software development pricing models that was used on freelancing platforms like Elance, oDesk, and Upwork. It works by the customer and the development team setting benchmarks or milestones together before the start of the development. Then the customer pays after the team achieves the predefined milestone. Just as in the time and material model, the payment is based on the time spent on development set at an hourly rate for the specific task (e.g., UI/UX design, QA, development, etc.)
Pros and cons
The milestone pricing model may sound fantastic because of the following advantages:
Payment for achieved results. The client has the privilege to pay only after they agree that a particular milestone has been completed. There are no prepayments.
Satisfying results. A team needs to reach the next milestone with flying colors to receive each new payment.
Yet the milestone model also has certain drawbacks to consider:
Unpredictable budget. The budget is highly dependent on how much time the team spends developing certain features and any changes they need to accommodate.
Undefined timeline. Like the budget, the final timeline is also quite rough, which may delay the project.
Risks. The milestone pricing model implies medium risk for both the customer and software vendor. Extra development hours, especially those spent on edits, may lead to disputes arising, plus there are risks around underpaying and underdelivering.
When to use the milestone pricing model
A trusted relationship between a customer and a company is the best foundation for using the milestone pricing model. It’s best suited for:
- Checking the performance of the chosen team and their manner of work
- Building MVP projects with easy-to-define milestones
- Projects with an unlimited budget
The milestone model lets you check everything before being charged, which makes it a good option for short-term or test projects.
Dedicated team pricing model
A dedicated team is an excellent option for companies that need to quickly scale up, manage overflowing tasks, and ensure ongoing maintenance and enhancement of their software. Instead of going through a tiresome and lengthy hiring process, the dedicated team pricing model lets you quickly expand your in-house dev department with seasoned developers. You can completely manage the team and development process on your side or have a dedicated project manager do that for you.
Here you pay fixed monthly payments composed of the team members’ salaries and the service provider’s fees.
Pros and cons
Choosing the dedicated team model is similar to building an in-house team, yet with greater perks for employers.
- Access to a vast talent pool. The dedicated team model can help you shrink your in-house knowledge gap without having to employ new team members.
- No recruiting headaches. This pricing model lets you bypass recruiting, onboarding, and training processes. A software vendor does it for you. Still, you may request developers’ CVs and interview them individually if you want to.
- No administrative duties. You don’t need to worry about covering administrative costs, yearly bonuses, sick leave, or vacation days. The software vendor does all of that on their side.
- Easy scaling. You can flexibly scale your dedicated team up or down over time.
At the same time, this pricing model requires you to invest time and effort to manage the team and has the following drawbacks.
- Supervision. The software vendor provides you with highly qualified personnel and takes the administrative burden, but you are responsible for the management of their working process.
- Fixed payment. In most cases, you pay a fixed amount for a dedicated team even if they work less due to roadblocks or downtime.
- Paid idle time. You still have to pay your monthly fees, even if you don’t have any ongoing tasks. The fees guarantee that the team is ready to step in whenever you need them.
When to use the dedicated team model
A dedicated development team model is ideal for clients who need to quickly boost the productivity of their internal dev team without recruiting more full-time professionals. It is also suitable in the following cases:
- You want to have direct communication with the software engineers and manage the project development process
- You are looking for a specific tech stack specialist or seasoned developers to temporarily join your in-house team
- You have dynamic requirements and are unsure how many developers and which tech stack you may need
- You have a high in-house turnover or are experiencing a shortage of tech talent
- Your in-house team lacks the necessary skills
So, if you have ongoing projects that require a diversity of skills and expertise—a dedicated development team may be a perfect choice.
Custom Software Development as a Service subscription model
Software Development as a Service, or simply SDaaS, assumes you pay a monthly subscription fee for a pre-set multifunctional team explicitly tailored to your project needs. This software development pricing model covers all the functions your project may require, including audit, consulting, development, testing, support, and turnkey modernization.
Pros and cons
Here are the benefits SDaaS can offer:
- Predictable costs. The SDaaS model helps you avoid unexpected development costs and allows for better financial planning.
- Streamlined handling of your requests. The development team is always ready to tackle tasks according to your priorities.
- No micro-management. You can focus on investments and business issues while the company works in the background, keeping you informed as much and frequently as you want.
- Flexibility. SDaaS helps you effectively manage the scope of changes by choosing the types of resources needed and switching them out whenever your project requires it.
- Speed. A pre-set solution saves you time that you could have spent on searching and evaluating diverse options and technologies.
Yet, the SDaaS pricing model has one major drawback:
- Vague understanding of the final budget. Having preliminary estimates doesn’t guarantee the team will stay within them since the project may evolve over the course of its development.
However, the team is always ready to advise to keep the costs in check, and you should make sure this is one of your touchpoints.
When to use the SDaaS model
The SDaaS model is the perfect choice in the following cases:
- You want to stay within a predefined monthly budget allocated to software development
- You want to be flexible and set/review project priorities while building your product
- You want a development company to have your back and step in with recommendations
The SDaaS subscription model is like Netflix. You have direct access to first-class software development professionals and a guarantee of quality and the seamlessness of processes.
SDaaS model vs. fixed-price model
Both the Software Development as a Service and fixed-price models share one common feature—you make a fixed, regular payment, usually once a month, so you can handle your financial planning wisely. But this is probably the only feature the pricing models share.
Fixed-price contracts work by fixing the scope, which often results in paying more than if you had adopted an appropriate variable pricing mechanism. The key risks relate to the clarity of the specification. If the specification is ambiguous or isn’t thorough enough, it gives “wriggle room” to dispute whether all the desired aspects of the service were included in the fixed price.
The SDaaS model offers a pre-set solution at a fixed price. This is a basic set of functions covering all essential aspects of a software development project. But still, it’s open for flexibility on demand. If the project needs more specific features, more time, or to be on a bigger scale, the development company will offer you options to scale your subscription package.
The custom SDaaS model is a mix of fixed-price contract certainty with the flexibility of time and material. So, it’s a perfect option for medium and long-term projects, including MVP development and maintenance.
How to choose the right pricing model for software development
The choice of which software development pricing model to use depends on many factors, including:
- Project size. The pricing model will differ depending on if you need a couple of developers to fill a lack of expertise in your in-house team or a full-scale team with QAs, designers, and project managers aboard.
- Scope. The level of detail and the project’s complexity can impact your pricing model choice. If you have flexible requirements, T&M, SDaaS, or dedicated team models can offer agility in the development process. Fixed-price contracts can turn such a project into a disaster.
- Goals. Whether you want a quick performance boost, MVP development, or a stable team to maintain your existing solution, the cooperation and pricing model should reflect the goal.
- Expected duration. Some pricing models work best for short-term projects (e.g., fixed-price contracts), while others are more suitable for medium to long-term projects.
- Budget expectations. Cooperation under time and material or milestone models often results in dynamic monthly payments. So if you want to have better control over your monthly development expenses, you should choose SDaaS, fixed price, or the dedicated team pricing model.
- Level of control and involvement you expect. SDaaS and fixed-price models expect a low level of client involvement, while T&M and milestone models require your active participation.
In some cases, choosing a suitable pricing model can be challenging. But don’t worry. An experienced partner, like Acropolium, can have your back and help you choose the best fit for your financial, business, and technical requirements.
Choosing a software development pricing model helps to ensure that both the client and the development firm get the maximum benefit from their cooperation. The choice greatly depends on the type of the project, and your punctuality, cost, and involvement expectations.
Time and material, dedicated team, and milestone pricing models can offer you great flexibility, while fixed cost contracts and SDaaS subscriptions can help you easily plan your finances. Any type of software project is suited to at least one of these pricing models. The challenge is to define which is best.
Software development outsourcing can be a long and bumpy journey, especially if you lack technical and management skills and expertise. In this case, the Software Development as a Service model has you covered with all the necessary functions optimized for your business needs.
Contact us, and we will be happy to consult with you on the topic and help you choose a payment option that fits your time, cost, and involvement expectations.
Frequently asked questions
What are the software development pricing models in the IT industry?
Today’s pricing models in the IT industry have matured from the traditional fixed price, milestone, and T&M models to agile pricing like the dedicated team and SDaaS. Each of them may be a good fit for a certain kind of project and should be chosen based on each project’s technical and management requirements, scope, timeline, and budget expectations.
What are some software development pricing factors I should consider?
The cost of a software development project depends on various factors, among which are:
- Human resources
- Project size and complexity
- Scope of work
- Level of client’s involvement
- Project duration
Apart from these, infrastructure and license costs will be important to the project budget.
Which pricing model should I choose?
The choice of the pricing model depends on factors like the project duration, the flexibility of requirements, budget expectations, and the level of control you’d like to have. This quick guide will come in handy when looking for a suitable pricing model for your particular project.
- Fixed-price model = short-term, clear scope, no involvement
- Time and material model = long-term, flexible requirements, high level of involvement
- Milestone model = undefined timeline, flexible/clear scope, high level of involvement
- Dedicated team model = medium-term, specific tech stack/quick performance boost, fixed payment
- SDaaS model = medium to long-term, flexible/clear scope, fixed payment, no micro-management
What makes SDaaS stand out from the crowd?
The Software Development as a Service model gives you a mix—the certainty of a fixed-price contract with the flexibility of the time and material model. The subscription covers all the functions that your particular project may require: audit, consulting, development, testing, support, and turnkey modernization. Among the benefits SDaaS by Acropolium are:
- Fixed monthly fee
- Pre-set multifunctional team
- 24/7 access to the project’s progress
- Streamlined handling of your requests
- No micro-management