Software Development Pricing Models — Which One to Choose?

Building new software or a project is more than just code. The process is a mix of tasks creating the architecture, analyzing project requirements, creating a design, coding, testing, and launching the product. Keeping the above in mind, business owners looking to build a product or software must be aware of the different software development pricing models in the market.

Choosing the right software development pricing model is crucial for the success of any project. The model tends to go beyond a routine payment schedule and to build a successful partnership; it must strike the right balance between the client’s expectations and the company.

Sometimes, a pricing model that may deem fit for Project A may not be the right choice for Project B. Therefore, businesses must consider the timeline, quality, type of project, expertise of the development team, and operational efficiency before choosing the pricing model.

In this guide, you will learn in detail about the different pricing models you can use, their advantages and disadvantages, and where they can be used. You can use this as a guide when you search for a good app development company that fits best for your business.

So let’s dive right into the different Software development pricing models.

Software Development Pricing Models

Software development pricing models are of 4 types and you can kickstart your custom software project by choosing any one of them.

1. Fixed Price Model
2. Time and Material Pricing Model
3. Milestone Pricing Model
4. Dedicated Team Pricing Model

Fixed Price Model

The Fixed Price model is where pricing, specifications, and delivery date are fixed. The scope is well-defined and precise. A predetermined timeline and goals form the basis for payment release. Once the terms and conditions are discussed, a contract is drawn.

Pros and Cons of Fixed Model

A Fixed Price has several benefits, among which are the following.

1. Clear Delivery schedule: The client knows what they will receive on project completion, as the project’s scope is fixed and on schedule.
2. Minimized risks: Payments are made only after the app development company fulfills all the requirements in the contract.
3. A clear plan of action: The client need not worry about the development process as the requirements are precise and specified with a clear plan of action in the contract.
4. Fixed payments: Payments are crystal clear with minimal variations and can change only if requirements change.

However, this model also has the following disadvantages.

1. No flexibility: An addition/change in requirements can lead to a longer time to market the project and increase the pricing too.
2. Overpaying: The final cost may be higher than expected as the app development company may have budget overruns.
3. Less control over the process: There may be miscommunication between the client and development team if requirements are not clearly defined in the beginning, or issues may arise at the time of development that cannot be foreseen.

Despite the pros and cons, a fixed-price model can be a perfect option for projects with a clear scope, requirements, limited features or budget, and short/strict timelines. It is also ideal for developing a Minimum Viable Product (MVP) to validate the market demand.

Time and Material Pricing Model

In this model, the client pays the company regularly for the development time spent on the project. The budget and time are decided, activities are discussed and can be altered when changes are being implemented. With the great scope and financial flexibility, changes can be made to the project to ensure it meets market demands and fits the budget.

Pros and Cons of Time and Material Pricing Model

The benefits of the Time and Material Pricing Model are:

1. Flexibility: You can quickly implement market changes and adapt your product accordingly.
2. Transparency: Clients can know the time spent on the project and what they are paying for each stage.
3. Agile development: The outline can be prioritized and worked on. Frequent reassessments can be made to adapt plans.

This model can have some cons as well.

1. Uncertainty: Frequent changes to the scope can push back the release date and impact the total budget.
2. Involvement: The product owner/client needs to track the development process, set priorities, and act quickly to ever-changing market demands

Businesses can opt for this model that does not have a clear scope and wish to be involved in the development process. For example, you can choose it if you want to follow agile methodology, do not have strict deadlines, and need to be flexible due to changing requirements.

Milestone Pricing Model

This pricing model is a combination of the two above models and is based on strict and tight deadlines with flexible changes. It is most commonly used on freelancing platforms such as UpWork, Elance, etc. The client pays only after a milestone is reached, and payments are based on the hourly rate of specific tasks.

Let us now see some pros and cons of the Milestone Pricing Model

The following are some advantages of the Milestone Pricing Model.

1. Satisfying results: The results are accurate as payments are made as per milestones.
2. Payment for achieved results: The client can pay only after the particular milestone is reached. There is no prepayment.

There are some drawbacks as well that you must know.

1. Undefined timeline: Like the budget, setting the timeline is challenging, which may delay the project.
2. Risks: Extra development time spent on edits, etc., may lead to disputes, as there are risks around underdelivering and underpaying.
3. Unpredictable budget: This is dependent on the time that the development team spends developing the features and any changes that are needed.

The milestone pricing model is best for building short-term or test projects. It can be used to create MVP projects with easy-to-define milestones, checking the team’s performance and projects with an unlimited budget.

Dedicated Team Pricing Model

This is the best pricing model for companies who need to manage overflowing tasks, scale up quickly, ensure ongoing maintenance, and enhance their software. Instead of a tiresome and lengthy hiring process, a dedicated team pricing model allows the client to manage the team and development process or have a dedicated project manager.

Some Pros and Cons of a dedicated team model

Opting for a dedicated team model is similar to building an in-house team and has the following benefits.

1. Access to a vast talent pool: Like an in-house team, you can choose whom to have for the project, choose the team composition, upscale or downscale the team, etc. You can also bypass recruiting, onboarding, and training processes.
2. No administrative duties: The software vendor or the outsourced company does all administrative responsibilities, such as dispersing wages, bonuses, leaves, costs, etc., from their side.

At the same time, the pricing model may need the client to invest their time and effort to manage the team and have some drawbacks, as listed below.

1. Fixed payments: In most cases, a fixed amount is paid for a dedicated team even if they work less due to any issues that may arise or downtime.
2. High-end Costs: Since this model consists of hourly payment rates, it is impossible to predict the end cost of the project. Unless the client is sure of the specialist’s hours spent on the project, the end cost cannot be determined.

Opt for a dedicated team model that wants to quickly boost the productivity of the internal team without recruiting full-time professionals or your in-house team lacking the necessary skills. This is the best model to go for if you are looking for a specific tech stack or experienced developers to join your team.

Final Thoughts

Choosing the proper software development pricing ensures that the client and development company get the maximum benefit. The choice depends on the type of project, user requirements, cost, and involvement expectations.

If you are looking for a mobile app development company to help get your idea off the ground, get in touch with us. We have different pricing models that businesses can choose from as per their needs and requirements.