What is risk? It is the potential to lose something of value. For a technology startup, that value could be its investment fund or its expected future returns. In order to mitigate risk, both parties – the startup entrepreneur and the mobile app development company – should carefully consider the type of pricing model before formalizing any contract.
Mobile app development is no small feat, and neither party should approach it without considerable thought. During contract negotiations (in any field), one side will often try to push most of the risk to the other. When this happens, irrespective of who ‘wins,’ both parties suffer the consequences.
Having been in the trenches for over a decade and after having helped many startups develop innovative products, we have come to understand that for an engagement model to be successful, it should strike the right balance between the client’s expectations and the studio’s app development cost and operational efficiency.
Below are some of the most common pricing models and when they work best:
Fixed Price Model
In a fixed price model, both the price and the scope of work are set in the SOW (Statement of Work) and neither can change without an agreement from both parties (the client and the vendor.)
In this engagement model, all decisions are taken before you begin the project. From the budget, the scope, the requirements to the timelines – everything is fixed. The success of this model is contingent on the planning, estimation and analysis of requirements. The more time you spend on defining the scope of your project, the higher the chances are of success with this model.
In order to determine the fixed price for the project, the client should be able to fully define the scope of the project and the vendor should be able to correctly estimate how many resources will be required and how much time will be spent on the project. If the vendor is not experienced, they may not be able to foresee how many resources will be required and eventually end up delaying the project. Incorrect estimation of various project nuances and deliverables can lead to constant negotiations between the client and the contractor and eventually hurt the product’s time-to-market.
Choosing the fixed price model is beneficial for you when any of the below apply:
- The scope of your project is well defined, with clear requirements, set specifications and defined timelines, and is unlikely to change for the duration of the project
- The project is small and will take a few weeks for completion
- You have entered into fixed price contracts before
- The vendor is reputable
Time and Material (T&M) Model
This is one of the oldest engagement models in which the client and the vendor agree upon an hourly rate. The rate is finalized after factoring in the expertise of the resources who are going to be working on the project, the time taken to complete the project and the location of the vendor. This model is known to work when the scope of the project is not clear and is likely to keep evolving during the course of project implementation.
In the development of a complex product, it is not possible to know all the features and functionalities well in advance; in such a case, this engagement model allows you to prioritize and adjust the scope of your project accordingly. It is preferred because of the flexibility to change requirements as and when the need arises. Also, this model involves greater transparency as the number of hours clocked are tracked through a time sheet.
Choosing the time and material model is beneficial for you when:
- There are too many unknowns and the requirements keep evolving
- The project is large and will take a few months to deliver
- You want to know if the amount of work done corresponds with the payment being quoted
This engagement model is a combination of both the fixed price and the T&M model. In this model, you pay a fixed price for an Ideation Workshop where your vendor helps you develop and define the scope of the project, and then switch to the T&M model for the project execution phase. This model serves as a good starting point and sets the ground for realistic expectations.
As part of an Ideation Workshop, you generally will formulate an innovation strategy that helps you develop your mobile app idea. The studio you choose will work with you to brainstorm and define your target audience, nail down the functional requirements of the app, build a complete feature set, produce wireframes and design mockups, determine technical feasibility and prepare cost and time estimates.
Choosing the hybrid model is beneficial for you when:
- Your requirements are unclear
- You want to develop an MVP to secure capital
- You want to optimize your budget without compromising on the quality of the final product
- You want to mitigate the risks associated with either model alone
Revenue Sharing Model
In this engagement model, both parties work toward a common goal so that both can reap the benefits from the end product. They put their heads together to develop the business requirements, set specifications, develop the project scope and estimate costs. Since their interests are aligned, both of them work to the best of their capabilities and share revenue once the desired outcome is achieved.
In this model, the client makes no direct payment to the vendor. The vendor recovers its cost and time investment in one lump sum or in shorter milestones once the product starts generating revenue. In case the desired outcome is not achieved, the vendor automatically becomes your risk sharing partner.
Choosing the revenue sharing model is beneficial for you when:
- You want to share the risk, if any, with your vendor
- Your technology vendor understands and shares your vision
Minimize Risk, Maximize Value
The choice of engagement model, although only an initial challenge, can have deeper repercussions throughout the course of your project, if not made correctly. It is best to adopt a rational approach which takes into account all known parameters and is not driven by any prior assumptions. Take the time to understand your business goals and do your due diligence on each engagement model before determining the best fit for your startup.
At July Rapid, we work with disruptive startups to build innovative products, and can help you select the best engagement model for your needs.