All you need to know about pricing models
Its a mobile-first world. Every business needs to seriously look at mobility.
IT sourcing for your development needs is the foolproof way of ensuring cost efficiency. There a multiple aspects a business needs to consider, before they choose the vendor.
Typically, this process consists of:
~ Outlining your business goal
~ Specifying what you wish to gain from sourcing IT solutions to external service providers
~ And finally choosing the right engagement model.
With focus on apps that ultimately generate revenue, it is important to choose a pricing model that works for both parties involved. Let us look at some of the major models of outsourcing software development and understand how you should choose the right one for your business - be it SMBs, Startups or midmarket firms.
The model, also known as a lump sum model, is popular among clients who want to know the estimated costs upfront before going ahead with the investment. The process involves the client getting in touch with an external service provider or agency requesting for a quote. The agency then asks the client to clearly define the scope of the project as well as list out essential features they would like to include. Some agencies will be willing to create the scope and list requirements for the client, ultimately requiring the client's sign off on everything. A well established and reputed agency will prepare a detailed RFP (requirements for proposal) before sending in an estimate to the client.
The flipside of this model is that client needs to clearly define the scope and the requirements of the project in addition to providing precise budgets and timelines. The external service provider then completes the projects in milestones, completing each crucial stage of the project timeline and delivering them to the client.
~ Projects are long term, with well defined scope and fixed requirements that are unlikely to change over time.
~ The vendor is responsible for understanding client requirements and expectations and deliver on them within a set deadline.
~ The client is ready to let go control of decisions regarding which members constitute the team working on the project. The vendor decides that and is ultimately supposed to deliver on the pre requisites and non negotiables agreed upon.
~ The external team has a good grasp on the intricacies and details of the product the client wants to develop.
~The issue arises if a client decides to change one of the aspects of the project midway. In this case the project then falls under a risk management venture where the vendor is forced to incur extra costs or firefight problems caused due to unforeseen delays. The service provider will also most definitely have to slash the margin rates in such an event.
~ Focus tends to shift heavily towards the price and timely delivery. Due to this various metrics like creativity and quality suffer. The working atmosphere also becomes less collaborative and more confrontational when requirements are at odds.
~ The final product might cost significantly lesser than the agreed upon price. While this is an advantageous situation for the service provider, the client could have incurred lower costs with the right type of model.
~ The onus is huge on the service provider as well. Estimation needs to be precise and all aspects need to be covered if the aim is to make a profit on the entire transaction.
The bottom line is that any kind of change is bad in this type of model. Time and energy both parties waste on scope and contract formalization will ultimately create stressful situations rather than business value.
Time and material (T&M) model
This model is more of a pay as you go model where it is impossible to clearly defines the scope of the project at the beginning. The project usually has dynamically changing requirements and the payment is made based on the amount of time the developer spends on your project as well as the resources used.
Here, the client's in house project management team will try to define the scope of the project to whatever extent possible. Based on this the service provider bids for the project. Once a pre negotiated hourly, daily, weekly or monthly rate for resources is agreed upon, the service provider then bills the client on a monthly basis. The amount depends on the skill set of the members working on the project.
To the client, this model offers a lot of flexibility. Unlike the FP model, the client can decide who works on the project as requirements keep changing at each stage.
~ Projects are long term with evolving requirements, scope of work that is unclear and varying work loads of development team.
~ Projects have extremely unique requirements and technology needs due to which it is impossible to make clear estimates.
~ When the external development team is not experienced on the technology required for the project.
~ Onus is more on the client. Since the payment is decided upon based on the time the developer spends on your project, monitoring whether actual work is being done becomes the client's responsibility.
~ If the client fails to provide clear definition of requirements, they will have to pay extra upon delivery. This might lead to uncontrolled cost escalations and unforeseen overhead costs.
In order to avoid such a risk, the next best model is Time and Materials with a cap that ensures that there is an upper limit to client expenditure. Any amount crossing the upper limit has to be incurred by the service provider.
Apart from the conventional- some "agile" planning strategies
In recent times, lean startups' pricing methodologies have been adopted by a large number of businesses and companies. It involves the same 3 step process mentioned earlier, but application of lean methodologies to each step ensures cost optimization.
Agile development is all about change and embracing it. App development is often a labor intensive and time consuming effort. It is impossible to predict or to have a picture of the final product well in advance. By corollary it is highly impossible to define clear requirements and scope of the project from the onset. Some of the best ideas required for improving an app come up during the development stage, so using traditional methods which rely heavily on pre specified terms becomes counterproductive. In such a case the agile development model comes to the rescue.
In this model, the entire app/software development lifecycle is divided into periods. At the end of each period, the client receives a functioning part of the app from the service provider. This counts as the completion of individual milestones. The model offers immense flexibility to the client in that continuous adjustments are made to the app during the course of development.
When talking about creating apps specifically, the fixed price model falls apart since the risks completely counter the basic creation principles of mobile applications. Out of the two conventional approaches, the T&M model perfectly complements the agile development model.
