We all pay for something every day, either coffee, water, gasoline, bills, etc. You probably would agree that getting a fair price on the items or services, has always been important. After all, who wants to pay more? We always have a desire to compare prices, whether for a sit-down dinner or shopping for different luxuries.
The startup founders and managers are experiencing something similar in the matter of developing a custom software solution, since the average development bill is quite significant. On the one hand, they want to get a quality product. On the other hand, they are afraid to get an invoice, not fully understanding where such an amount of money came from. Customers worry about overpaying for the services of an IT company. This fear is justified, because according to cbinsights.com, pricing and cost issues are among the top 5 main reasons of startup fail.
We will tell you how you can get an honest price for software development, to stay aware of the whole product creation process, and succeed in your business.
The formation of a transparent custom software development pricing includes the following steps:
- Quality project planning
- Choosing the right pricing model
- Contract with indicated planning results
- Experience and reliability of the development team
Let's take a closer look at each of these stages.
І. Quality project planning
Like any project involving costs, processes, and people, custom software development requires preparation. To make your tech startup successful, with all stages and processes established, it is necessary to carefully plan and organize its development. First of all, you need to carry out strategic and tactical planning. During strategic planning, your team determines the goals of the business project and develops a strategy to achieve them. After that comes the time for tactical planning. At this stage, you have to determine the deadlines for achieving goals, decide on the necessary resources, and most importantly, write down the specific actions.
That's where the fun begins. During tactical planning, you carry out:
- architectural planning;
- operational assessment;
- implementation planning.
More to the point, you need to:
- create a logical architecture for product development, define milestones (large parts of a project) and specific tasks;
- discuss all organizational issues, estimate the work load, assign different tasks, ensure that you have the appropriate quality and quantity of performers, and the necessary finances;
- choose a methodology for development (scrum, waterfall or another);
- select the appropriate pricing model.
Of course, you can try to do this on your own, or you can go the easier way and seek the help of specialists with experience in creating unique projects for the individuals specific needs.
A great advantage of startup planning is that you can create an architecture in a way so that you get only the essential functionality. It will be developed without any unnecessary features, the creation of which requires more costs. That is, IT consulting allows you to get a product solely developed on the basis of customer goals and desires.
High-quality project planning with the help of IT consulting, even before the conclusion of the contract, enables you to plan all aspects of the project in such a way that prevents the risk of overpaying for the custom software solution development. Consulting allows you to fairly accurately determine the amount of work on product development and make accurate estimates and calculation of cash. In turn, your company loses the risk of overpaying or receiving not what was expected.
II. Choosing the right pricing model
As you can see, part of the planning of the custom software development is the choice of an engagement model or pricing model. In simple terms, the pricing model is a way in which the cost of software development services and the method how the customer pays for these services are formed. So the choice of pricing model is that the software customer and their supplier decide how much, when and how the payment for the IT company services occurs.
There are several types of pricing models that suit different projects. Each of them has its pros and cons, but they are only their particular features. Their characteristics suggest which pricing model is the most suitable to your circumstances and will help you to be aware of what you are paying for, and when you are doing this. You have the right to choose the model that will be the most effective in your specific case. For example, you can opt for a pricing model that allows you to be as involved as possible in the development process.
Types of pricing models:
- Fixed price - Fixed Price;
- Time and Materials;
- FFF - Fixed time, Fix budget, Flex-scope;
- Dedicated Team;
- Milestone based model.
Pricing Model - Fixed Price
The name of the model speaks for itself. After a detailed analysis of the complexity and scope of the startup, the software company sends their client a project implementation plan and a fixed budget of the entire software product development. Due to this pricing model, the exact cost and terms of startup development are determined and do not change for the client.
Be aware, there is one "but"! If the client wants to add a new function that is not in the documentation, after the agreement of the parties, it's drawn up by an additional agreement to the contract. In this case, the client will have to pay extra. Strict terms of the Fixed Price contract provide minimal risks for the customer and high risks for the software provider, because the customer will not pay extra for additional development hours that may be needed.
- Works for medium and small projects, as well as for MVP
- For a client, the cost of startup development doesn’t change
- Strict adherence to the development deadline and result predictability
- The price remains fixed until the customer has changed the requirements
- Does not require client control, since all the details were spelled out in the planning
- Preparation takes a lot of time
- Detailed documentation is required before the start of software development begins
- Not suitable for working on large and complex projects
- Partners agree on the necessary changes and indicate them in an additional agreement to the contract
- The execution of additional agreements to the contract may slow down the startup development
Pricing Model - Time and Materials
This pricing model is characterized by more flexible terms and costs. The project cost is formed from the provision of established payments for the time spent on development. That means that the customer pays for the actual working hours of the developers at the rates previously agreed with the IT company. At the same time, the client pays gradually as sprints or tasks are performed.
- Works for long term tech projects
- Gradual payment for the finished result
- Quick start - no need for lengthy planning and documentation
- Process transparency and contact with the customer throughout the project
- Ability to make changes in the development process
- Not fixed startup deadlines
- Unable to accurately plan your budget
- Time required to work with the project development team
Pricing Model - FFF — Fixed time, Fix budget, Flex-scope
With the FFF pricing model, everything is simple: the deadlines and budget of the tech startups software development cannot be changed under any conditions, which includes work scope adjustments. What does this give you? The ability to plan a budget before beginning a startup, to know its final cost, and date of release. Who owns knowledge also owns the world. Quite possible. But we can confidently say - who knows the price and release date of a startup - to these ones it's easier to plan their expenses and project launching. An important feature of this pricing model is that under these conditions, the work quality does not suffer.
Working by the FFF model, adhering to the established deadlines and budget, the customer and the development company work together, setting priorities. Imagine that a client ordered the application development for trading with $200 budget. If at some stage the client with their wish list exceeds the budget, the team changes functionality, giving preference to the most important functions. As a result, the budget is not exceeded, and a quality working application is released on time.
- The ability to get a quality product with a limited budget
- Strict deadlines
- Changes in the scope of work do not affect the development cost
- The contractor and the customer collaborate in the development process
- Constant customer cooperation with software solution vendor
- The executing company should be flexible in its work, make sure that it does not exceed the budget and plan its work well
Milestone based pricing model
A characteristic of the Milestone based pricing model is that the work development scope is pre-divided into separate parts, or milestones. In most cases milestones are not the same, as it takes a different amount of time and, accordingly, client funds to create different functionalities. So IT company in turn, depending on the importance, completing one milestone proceeds to the next. Thus, in the same way as in the Time and Materials pricing model, the customer pays gradually, with the only difference being that they pay the planned costs for each successfully completed milestone.
- Software solution customer pays for individual workloads
- The client does not pay one large sum for the entire project development
- The team is motivated to receive a fee for the work, so it performs tasks efficiently
- The client pays for the actual provided functionality
- Low risks, transparent work, and predicted results - since the project is under the client's control
- There is no fixed price. The development of each milestone requires a different amount of time, so they have different costs
- There is no way to determine the exact release date
- Approximate project budget
Pricing Model - Dedicated Team
Before starting development, the software customer and the IT company discuss the product requirements, workload, and calculate the time needed to complete the project. At the same time, the software development company provides the customer with a dedicated team of necessary IT professionals that meet their requirements and expectations. Each month, the software customer pays for the work of this team. This model is different in that the client controls the entire project development, and the software company helps to solve organizational issues. It is good to use it when the client knows in advance that the requirements will often change.
- Works for complex long-term projects
- Client significantly saves on infrastructure
- The client fully manages the development team
- Your dedicated team devotes 100% of its working time to your project and deeply understands your product
- The team works on a long-term basis and is interested in quality
- Dedicated Team pricing model is the most expensive cost wise
- Big expenses and time for managing a development team
Each pricing model is suitable for different projects and under different circumstances. But the right choice of model allows you to get transparent custom software development pricing.
Let’s keep going.
ІІІ. Contract with indicated planning results
One of the most important components of the qualitative formation of a transparent software development pricing is the preparation of a contract between the customer and the vendor. This is a document where the results of planning the development process of the entire software product are indicated. Such a contract is necessary, primarily for the fact that it gives certain guarantees to both parties and eliminates many risks.
So what should be in the contract?
In short, the partners write in it the results of IT consulting, namely:
- all estimated tasks (or sprints, milestones);
- the number of required people in the project team and their specialization;
- technical issues;
- organizational issues;
- the selected pricing model that we talked about in the previous section;
- financial expenses and the cost of the project (if possible according to the project type).
The final cost of the project development, whether it's exact or approximate, can be obtained simply by summing up the estimates and the agreed costs. It depends on the pricing model. All this ensures transparency of custom software development pricing. In this case, the software development solution customer can see how the price is formed or, speaking more simply, what they spend their money on.
One of the options for ensuring price transparency is also a code warranty. It doesn’t just help an IT client go to bed without a sedative. A code warranty means that the final price of the development will not change due to the fault of the vendor. If something happens, you will not need to frantically search for a new service supplier or additionally pay the previous team for troubleshooting and maintenance. They will do it for free. When a company gives such a guarantee, it means that it is doing its job efficiently and knows that no modifications are required.
IV. Experience and reliability of the development team
Planning, strategy, pricing models, a detailed contract between the parties in the custom software development - all this is undoubtedly important, you probably have already managed to verify this. But how can you be sure of transparency pricing without having a trustworthy team behind it?
To implement a successful project, you need a reliable team, a software vendor, which:
- has lengthy experience in software development;
- finishes projects on time;
- gives certain guarantees;
- offers reliable protection of your data;
- provides complete confidentiality of the entire development;
- concludes a contract.
You are ready to entrust your business project to such a team, right? All this indirectly gives the client confidence that the reliable team of the IT company is the one that can take responsibility for the project. Having done their work qualitatively, the team will complete what has been started, right up to the point it will correct the errors at its own expense in the shortest possible time and without noticeable loss to the customer.
To summarize the above, transparent custom software development pricing is real. To provide it for your business you need:
- to carry out the quality project planning;
- choose the right pricing model;
- enter into a contract;
- work with a reliable team.
In the end, transparent pricing is what should and can be provided by a software company, because it’s not just a matter of money. For example, to give maximum confidence in the final result our company provides customers with a lifetime code warranty. We also realize that transparent custom software development pricing is primarily a matter of normal relationships, trust, and the ability to work with the customer in order to create a really cool product together. It’s worth more than money, right?
Let's talk about your project!