Naprok > Blog > Outsourcing Pricing Models - What will work for you?

Outsourcing Pricing Models - What will work for you?

Inna Levchenko

Every software developer might say that their set of tools was matched wisely by the expectations, peculiarities of tech-stack, integration with the other software, and general performance of these. Such an attitude helps to make the workflow more efficient. So, what’s about the same approach toward money? Is there a route to make your business more profitable using this tool? Well, this is all happening with outsourcing. Doubt it so far? Let me prove this by the data:


global market size of outsourced services

Global market size of outsourced services from 2000 to 2017 (in billion U.S. dollars)* 



The thing is that outsourcing increases by leaps and bounds. The subsequent fact about these services suggests that these were equal to ~13% of the US budget last year. Fascinating, isn’t it? The reason is evident - to delegate the software development to an outsourcing vendor is more profitable than hiring in-house staff, despite the market you’re in.

Meantime, such a broad variety of industries and their needs caused the number of pricing models of the services. Based on the area of software development, there are top three of them: fixed price, time & material (hourly rate), and dedicated team. Each price agreement is excellent on its own. However, out of all models, there’s the one that delivers maximum value for your business.  

Here are the attributes you have to puzzle out to accept the most appropriate way. So, let's get this show on the road.

Fixed Price Model

Fixed cost pricing is the model that guarantees strictly defined conditions regarding time-frames, the scope of work, and a budget. Before the team embarks upon a project, the service provider and the client both should discuss requirements, specifications, and schedules to mitigate the risks for either party. 

When the price and time length are estimated, all control of the development process is passed down to the project manager who works from the vendor’s side. Nevertheless, the product owner can check the performance by speaking with the PM now and then. There is likewise a possibility to add new features that hadn’t specified in the treaty. If so, the secondary assignments will be carried out in the aftermath of the extra payment agreement.


fixed price model

The fixed pricing is a perfect option for small- or medium-size projects as far as these are easy to estimate precisely. It follows that financial risks are minimized due to the payment after the project is done or part-payment based on the milestones. Although the fixed price is popular, several people are unlikely to use this one since in-depth planning and Waterfall methodology disclaim responsibility for viable apps. Hence, you ought to peruse the other models to leave no doubt regarding what choice you made.

Hourly-rate or Time & Material Model

Contrary to the previous model, time & material pricing comprises flexible requirements. It implies that the work scope for the project doesn’t set as well as a final budget. So long as you work through the T & M model, you, as a product owner, emphasize technology stack and code quality, rather than on costs and performance time. An amount of money is paid differently according to the number of hours spent in carrying out designated tasks. From here, by signing up for the outsourcing treaty both sides have discussed an employment size, fixed price per hour for each engineer, stacks, and the approximate duration of cooperation. 

time and material pricing model

Such a model is suitable for medium- and long-term projects so that it's impossible to predict where the company could end up with the progress in subsequent years. The hourly-rate includes the possibility to scale up the team members, extend the skill-set and choose the weekly working hours for engineers individually. To put it in other words, a kick-off process is free of rigid rules, thus it makes a bureaucratic process easier.

The two-edged weapon of the time&material is controlling under the performance more significantly because of direct involvement in the management process. On the one hand, you’re always aware of the current status of development, on the other hand, you have to control every stage of production. Worthy thing is that your product will be fine-tuned to perfection and live up to your expectations. 

Again, T&M runs like clockwork for the entrepreneurs who tend to use Agile methodology because of complicated requirements for products, which change frequently. However, the model might occur the worst if your goal is to build a cohesive team. How will we achieve this, you ask. The next pricing is a key, then let’s keep moving below. 

Dedicated Team Pricing Model

This outsourcing pricing model targeted a team-based approach. It means a service company provides you with remote employees for a while. This team commits itself to attain the client’s objectives working as the extension of the current in-house team. Advantages of the dedicated team include the fixed price for each developer per month and the equal time of workday starts. Monthly payment in terms of the total sum for each rate of every engineer per hour. What is more, the team scalability might be changed along with the knowledge retention so as your vendor remains the same one.


dedicated team pricing model

The dedicated team model applies to the product owners who are ready to manage the whole development process through day-to-day communication with both in-house and remote employees. The bright side of full management from the client-side is that such control helps to build loyal and highly motivated external staff. This team synergy and stability makes sure that all members have a profound understanding of the expectations and will create the quality app since they see the goals you establish.

In contrast to the obvious advantages, there are few limitations as well. Firstly, this pricing model is a lost cause for short-term projects so a selection of team members will take you more time as compared to a contract on the fixed price basis. Secondly, the client must bear more responsibilities such as the active engagement of the development process and the creation of a close-knitted team. 

Deciding between three options

Each of the models comes with great advantages, so hesitations are inevitable. The matter is the pricing which worked for one type of business might be inappropriate for another. In essence, there’s no “one-size-fits-all” solution for your enterprise. Consequently, the right pricing strategy to follow will be to explore the market and ask for advice from prospective service providers so as they are good at consulting on outsourcing areas. If you try to figure out whichever structure is the greatest one by yourself, here’s the comparison of service models mentioned above:


outsourcing pricing models comparison

To sum up, effective outsourcing cooperation is the one that would serve both parties’ interests. Nowadays the IT market has a wide range of companies which are aware of the impact of vary agreement on client’s business. This due understanding helps to decide on the best-fit contract even if this entails some deviations from the common outsourcing principles known across the software development industry. One might even say whichever agreement is it, this one should simplify the business process, rather than the other way around. Mind you, the deciding among all pricing models includes data protection, reduction of unexpected extra costs, risk, transparency, and reliability of the vendor - that’s the way you will achieve the desired results.