Which Payment Model to Choose for Software Development Outsourcing?

Outsourcing your custom software product development services is way better than hiring an in-house team. With rising trends of ‘work from home’, companies are adopting cost-effective approaches to minimize their expenses.

Resource cutting is one of the smart practices that can help companies save more costs on infrastructure, pay scale offerings, and many more.

IT department is the most valuable department of any company and requires a large team of developers, designers, testers, QA specialists, etc. It’d be a great way to team up with outsourced development providers and save additional software development costs.

When hiring outsourced specialists, the biggest challenge is to select the right pricing model. You must balance the risk and rewards for both while ensuring that the custom software development solutions get you the desired ROI.

As there is a wide range of pricing models to choose from, we’ve come up with 4 major pricing models that can be beneficial. You can consider any of these models to ensure a productive software development outsourcing.

4 Pricing Models to Consider While Outsourcing Your Custom Software Development Services

    1. Fixed Price Models

    The fixed price models can be immensely beneficial to the projects having a precisely defined scope and a stable set of requirements. These models are the best suited for the long-term projects having a large value to the outsourcing work.

    While opting for this model, you can go through the fixed-price contracts. Through these contracts, you can be covered with all the risks associated with the project not being completed on the time. You can hold your outsourcing partner’s payment until the work is completed.

    This helps in conveniently protecting your budget and ensuring that the project completes on the deadline.

    However, be prepared for the situation when your outsourced development providers can ask for flexibility in the payment terms. Some might ask you to pay a bit of an amount as certain milestones are achieved. On the other hand, some will want to make sure they aren’t left high-and-dry, in case you’re too rigid.

    So, you can always make the required adjustments to the fixed pricing model contracts based on your partner’s preferences.

    2. Time and Materials (T&M)

    This is the most preferred pricing model that requires your custom software development company to bid for the project. The bidding can be done based on your project requirements, scope, timeline, and the amount of work.

    This model can be highly beneficial to you as well as your development partners if you’re good at outlining the project needs. This reduces the extra time consumed by your development partners in laying out the project needs and deadlines.

    So, while you opt for the Time and Materials Pricing Model, be ready with an effective project management team. They can do the strict monitoring of the project while ensuring that it finishes on the required time & budget.

    3. Incentive-based Pricing Models

    The incentive-based pricing models contain bonus payments to the custom web app development outsourcing partners. These bonuses are the rewards that are given by the clients for meeting the performance goals beyond what’s written in the contracts.

    However, the incentives can also be introduced in other pricing models to boost the developers’ motivations.

    While choosing this model, you need to set the guidelines and benchmark on crossing which incentives should be given. As many companies end up paying partners for premium services that never has benefited them. So, this model can be complex if you’re not good at deciding when to give incentives.

    4. Shared Risk-Reward Pricing Model

    If you’re looking for a model with a bit of extra flair, the Shared Risk-Reward Pricing model is the perfect option. Likewise, the Incentive-based model, this model also holds a flat-rate which can be given when their custom software solutions providers achieve specific objectives.

    However, in the Shared Risk-Reward Pricing model, the client and service providers share funding for the development of new products. It enables your development partners to get the rewards only for a defined period.

    The Shared Risk-Reward Model motivates developers to come up with new and innovative ideas to improve your business.

Whatever the pricing model you choose, always remember that software development outsourcing is a partnership. By clearly communicating your expectations and choosing the right pricing model, you can always get along to achieve success.

If you’re looking for the right software development company to fulfill your IT needs, we can help you choose the best pricing model for your business.

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