Comparison of Pricing Models
Most companies aim at long-term strategic partnership with their clients. But it is hard to ensure both trustworthy relationships and flexibility in engagement requirements. Which business model to use with clients - is one of the most crucial questions. There is no unambiguous answer to it. Right business model depends on variety of factors and needs clarifications according to specific use cases.
A business model is a contractual agreement, signed between IT services provider and a client, that specifies working methodologies, delivery terms, pricing, etc. Depending on the scope and duration of the project there are different business models and in this article we would like to give comparison of the three most widely applied models: Fixed price, Time and Materials, Dedicated team.
Fixed price model
Fixed price model is preferable for the small or medium scope short-term projects with clear and well-documented requirements. It involves precise scope and project specifics, predefined delivery period, and fixed budget. When client specifies time frame and detailed set of requirements to the end product that isn’t likely to change throughout the project, outsource company can provide schedule and estimate price on the basis of project scope and complexity. Main development stages are defined during discussion and waterfall methodology is applied. This engagement model doesn’t require close client’s supervision, but presupposes some scope-related risk for both parties, since any deviations from the original plan will result into additional expenses.
Advantages of the Fixed price model:
- Good for small and medium level projects that have well-defined specifications and precise deliverables from the start.
- Cost and timeframe are specified before the beginning of the work on project.
- Little supervision is required from the client, all requirements are defined beforehand.
Drawbacks of the Fixed price model:
- Demands ability and time to precisely define requirements, timetable, and approval criteria.
- Less flexible in management of additional features and changes, each request results in re-negotiation of the delivery schedule and price.
- Due to lack of direct communication between client and provider there is possibility of quality issues and dissatisfaction with the end product.
Time and Material model
Time and Material model is more suited for the long-term projects with dynamically changing requirements, undefined scope of work and varying workloads of development team. If on the first stages project is still raw and there is no sufficient data to properly estimate the final cost or client wants more direct control over the process, this model provides flexibility to define and change project specifications at any stage of its implementation. Size and workload of the development team and resources assigned to the project can be adjusted according to the evolving requirements, simultaneously optimizing time and costs.
Advantages of the Time and Material model:
- It uses agile methodology, perfect for large and long-term projects that can’t predict the end product on the initial stages.
- Flexible and negotiable budget and low risk for both parties.
- Significant client’s control over the project, any task or enhancement implementation on demand.
Drawbacks of the Time and Material model:
- No strictly defined time limits or assurance in project completion on time.
- Budget estimate may differ from the final cost and is less controlled, the more change requests clients make, the more they have to pay.
- Client’s involvement demands time and human resources.
Dedicated team model
In the Dedicated team model outsource company provides competent IT experts, equipment, and other resources based on project requirements. In return client pays single sum of money that basically includes each team member’s monthly salary and provider’s fee. Client has full management control over the project and team, can manage resources and plan work scope at their own discretion with the maximum benefit for themselves. Dedicated team seamlessly works as a part of the client’s infrastructure, shares the same perspective on the project methodologies and is very interested in achieving company’s business goals.
Advantages of the Dedicated team model:
- Suited for long-term projects where requirements are unclear and scope changes frequently.
- Fully predictable budget, though workload and scope are not fixed.
- Complete control over the selection, motivation and management of dedicated team members that have profound understanding of client’s expectations and objectives.
Drawbacks of the Dedicated team model:
- Low efficiency for short-term projects, and waste of money if there are no tasks for the team.
- Dedicated team members have less opportunities to learn new techniques outside their area of expertise in the project.
- Client must take active role in communication and negotiation and invest a lot of time into management.
Most parts of the pricing models are negotiable, so if you want to work on a large and long-lasting project, it is better to split project into several stages or task blocks and apply to them more appropriate pricing models. It is possible to combine several available contract models that will be more suited for each project and will create a win-win relationship for the involved parties.
Quintagroup provides all three pricing models listed above, plus support service packages. Contact us for more information at any time and experience Quintagroup intricate care for each customer and project, big or small, business or personal.