Factors to consider when choosing the pricing model in the IT business

In the development of websites and other IT products, it is important to immediately choose the form of pricing and the type of interaction with contractors that meets the needs of the project.

For example, Agile, due to its flexibility, is suitable for startups, and a dedicated IT team, which takes into account the salary of employees and administrative costs in the price, is suitable for large companies.

In this article, we will consider the most popular pricing models. You will understand their advantages and disadvantages, as well as determine which model will be suitable for your field of activity.

The most popular pricing models

There are a lot of interesting pricing models in the IT business. Each one has its pros and cons. Let’s consider the most popular of them.

Time and Material Project

Time and Material Project (T&M) is a model in which the price is formed from the time spent by the team and materials for the development of the project.

It is most often used in cases where it is problematic to determine the exact cost of the finished product. T&M is suitable for small medium-term projects that are carried out by a small team (1-3 specialists).

Advantages of the T&M model:

1. Efficiency. The client can quickly change the work plan or requirements for the final product;
2. Flexibility. T&M goes well with modern Agile methodologies like SCRUM;
3. Result. The ability to see the result at all stages, as well as to constantly monitor the progress of work and interact with the team.

Flaws of the T&M model:

1. Budget. It is not always possible to estimate the budget in advance. It all depends on the accuracy of the instruction or its changes in the course of work;
2. Communications. With this approach, you may have to spend a lot of time communicating with the customer. On the other hand, it will improve the quality of the finished product.

Dedicated team

A dedicated team is a specific team to develop an IT solution. Pricing consists of the monthly salary of all team members, as well as additional administrative costs.

The dedicated team method allows you to form a team, taking into account the level of professionalism of each of its participants and the budget of the project.

It is perfect for long-term projects with unclear requirements or large internal projects of the customer’s company, in case it does not have enough qualified personnel. The customer can independently manage this team, and the administrative part of the work falls on the executing company.

Advantages of the dedicated team model:

1. Control. The customer can exercise full control and management of the team, and regulate the workload of each of them;
2. Professionalism. Individual approach to the selection of specialists, their level of knowledge and experience in a particular field;

Cost reduction. The remote team controls deadlines and, if necessary, handles additional recruitment.

Cons of the dedicated team model:

1. Instructions. Working with insufficient instructions, a remote team can create a project based on their own preferences, which is not always a good thing. However, sometimes experiments more than justify themselves.

Fixed-price

Fixed Price – a method in which a fixed price is already set for specific services of the company. Unlike other models of financial interaction, a fixed price is best suited for short-term projects.

For example, when a customer wants to work with a new partner and, to minimize risks, launches a small pilot project, which will take a month or two to develop. But the method is also acceptable for long-term projects.

But unlike the concepts of T&M and a dedicated team, in fixed-price, it is important to have all the necessary documentation for the project, and all instructions, and it is also strictly obligatory to implement the plan.

This method should only be used when you are certain that the product requirements will not change in the future. And in the case of force majeure, you will have to sacrifice functionality for the sake of deadlines.

Pros of the fixed price model:

1. Accuracy. Carefully formed instructions and requirements allow you to get exactly what you need;
2. Timing. The development process and the deadline are discussed in advance, so the deadlines will not be violated.

Cons of the Fixed Price model:

1. Risks. With such a model, it becomes difficult to manage the risks associated with the emergence of new tasks, frequent edits, and additions to current ones. Because of this, for example, when developing a website or application design, it is better to use the hourly rate method and take into account the time it takes to complete the project;
2. Control. The project is managed by the contractor, which makes it difficult for the customer to check at what stage he is and how he meets the expectations;
3. Clients. The price may not be attractive to everyone, which makes it difficult to focus on different groups of customers;
4. Flexibility. With a fixed price, the flexibility of interacting with customers is not possible.

Agile value

Agile value is a modern, flexible pricing model that is based on the company’s costs, their changes in the course of work, the perception of the price by the customer, and the prices of competitors.

This model supposes the close cooperation between the customer and the contractor’s team. The work is usually divided into sprints, which are completed in a short time.

Agile value is suitable for both short-term and long-term projects because a constant stream of important tasks is created, which are based on the actual needs of the customer. This method differs from all previous ones.

Advantages of the Agile value model:

1. Efficiency. The flexibility of project management allows you to effectively make changes to it at any stage, and get exactly what you need from the contractor;
2. Control. The customer is directly involved in the product development process, sets tasks, and therefore fully controls and regulates work processes;
3. Transparency. You see the result at the end of each sprint.

Cons of the Agile value model:

1. Time. It takes a lot of time for both the customer and the executing team to agree on any proposals and changes.

Pay as you go

Pay as you go (PAYG) is a method in which payment is made for a specific service. This method is used, for example, by public utilities: you use a certain amount of electricity in a month, and you receive payment only for the electricity used.

In the IT sphere, PAYG uses some services that provide cloud storage. It is arranged like this: if a customer uses 1 TB of space per month, then he will pay only for 1 TB.

Therefore, the method is suitable only for those companies that offer a paid service, and not application development services or implementation of marketing companies.

Advantages of the PAYG method:

1. Prices. Since users pay only for what they use, and not according to the tariff, the offer for customers becomes profitable;
2. Efficiency. Company resources are used as efficiently as possible.

Cons of the PAYG method:

Limitation. The method is suitable only for product IT companies in which it is easy to determine the cost of a unit of production.

Things to take into account

First of all, you need to take into account the complexity of the project and the time it takes to complete it, and then choose the type of team and pricing.

To choose the appropriate method, one should take into account the specifics of the field of activity, the number of specialists who will be involved in projects, their level of professionalism, as well as the degree of credibility of the company in the market.

If you want to try a dedicated team, Intellectsoft provides such a service. The company built a good team to develop quality IT projects.