Hiring a development partner is the most effective way of building a robust digital product for most businesses. However, choosing a suitable pricing model is one of the most crucial decisions development companies must make.
Since modern technologies took over the world, big and small businesses have been seduced by the undeniable benefits of digital products. I mean, what’s not to love? You get a beautiful application with your company’s name in bright letters and dazzling colors. Your customers, in turn, get instant access to your portfolio and start spending the big bucks from the comfort of their couches in the blink of an eye. Ahhh, yes, that’s the beauty of going mobile: access to everything with the swipe of a finger. However, as we developers know all too well, there’s a myriad of “behind-the-scenes” action that remains hidden from the outside world. Programming languages, tech stacks, sprints, code reviews, QA testing, and maintenance protocols often go unnoticed by users but are tasks we need to perform to keep their apps running smoothly. Overlooked as well, is the fact that any development partner needs all those elements to fall under the umbrella of a suitable pricing model, and choosing that pricing model isn’t always straightforward. Sometimes, flexible plans lead to overcharging. Other times, fixed rates can end in undercharging. And most times, business owners, especially startups and small enterprises, don’t know which scheme to choose. So, what’s the best pricing model? How do you choose? Well, there’s no one correct answer, and here’s where the predicament between a fixed rate and a hourly rate becomes relevant.
Selecting a suitable pricing model is crucial for both the development company and client because it establishes a balance between what works for both parties and lays the groundwork for a trusting, long-lasting relationship. And since no one knows the importance of the transparency of the relationship between clients and developers better than us, we at Foonkie wanted to tell you all about the fixed price and hourly rate models. We also wanted to highlight the pros and cons of both so you can make an informed decision, regardless of if you’re a developer or a business owner. Let’s begin.
What is a fixed rate?
A fixed-rate pricing model, also known as a flat rate, is when the scope of the project, its requirements, and the time it will require for completion are fixed and agreed upon upfront. These definitive estimates determine a set price that either party cannot modify once the project starts, regardless of how much time or effort it takes to complete said project. Most development companies have their fixed rates defined for specific projects and know exactly what to charge based on standards they’ve defined over time. Others, however, calculate their fixed rates for each individual project depending on its specifications, requirements, and the estimated hours it can take to complete. Either way, a fixed rate pricing model gives your client a clear-cut idea of how much money they will spend and allows them to plan their budget clearly. A payment scheme can also be agreed upon where the client can pay at regular intervals until the work is completed. However, it also means there has to be an unspoken agreement between both parties that guarantees that you will carry out everything regarding the project at no extra cost. This aspect is crucial in the fixed rate pricing model to avoid misunderstandings and to besmirch what would otherwise be a long-lasting business relationship.
Pros of a fixed rate
Here are a few of the main reasons why going with a fixed price pricing model might be a good idea:
Fixed-rate contracts allow your client to quickly understand what they’re paying for, which helps them feel more secure and confident when going into business with you. They also know upfront the exact figure, helping them plan their budgetary needs better and do their financial planning more straightforwardly. This aspect is especially beneficial for startups and small businesses since they typically have limited budgets and need to know upfront how much they’ll have to pay so they can plan accordingly.
Certainty in deadlines
When you charge a fixed rate, you have an obligation to give the client a contract where one of the main points, besides the total price, is when you will complete the project. These agreed-upon terms that declare the deadline for the project’s completion in advance help all parties involved understand its scope and functionality before finalizing the agreement. Thus, your client has a broad understanding of the essential information regarding the product’s architecture, UX/UI design, requirements, deployment, testing, release, and maintenance beforehand and knows how and why these items affect the deadline so they can plan marketing campaigns, release events, or advertising meetings with time. Still, note that, no matter what, after the contract is signed, all these items must remain unchanged during the project’s creation and completion.
No room for surprises
The fact that a fixed rate pricing model clearly delineates the terms by which the project will be fulfilled means there’s no room for surprises. Under a fixed rate, neither you nor your client has to worry about unplanned details or unforeseen circumstances that can result in extra fees or longer delivery times. On the contrary, since your development team is working toward deployment with a clear plan of action, there’s no room for midway project changes that can cause a breach of contract or cause your client discomfort. Also, since every detail regarding the product’s requirements and functionality is hashed out from the get-go, and the contract is signed beforehand, you cannot charge extra fees, regardless of any additional time or efforts your team incurs after the agreement. While this might seem like a hassle for you, it is actually a good thing for your client since they can plan their release and budget with time and not worry about any unwanted surprises.
Clear goal definition
Let’s face it; we’ve all worked with clients who are constantly trying to creep up a project’s scope ladder and asking your team to add functionality or features well into the development process because they think the more, the better. A fixed-rate pricing model allows you and your client to reach a mutual agreement on the exact scope of the project as well as its goals and specifications beforehand. This way, neither you nor your client will be tempted to add, remove, or modify any part of the project unless, of course, it is agreed upon.
Cons of a fixed rate
As you can see, charging a fixed rate seems like a good idea. It eliminates surprises, minimizes unforeseen circumstances and extras, allows clients to plan their budgets, and helps them make informed financial and marketing decisions. So, yes, it may seem like a fixed-rate model is the way to go, especially if these aspects are crucial for your client and your company. However, it may not be ideal for many other agencies because of its drawbacks, which include:
Lack of flexibility
As stated earlier, a fixed-rate model is very rigid. Once you and your client have come to an agreement and both parties have signed the contract, there’s no wiggle room, meaning you can’t add or remove any of the items that were agreed upon. While we mentioned this could be seen as a benefit, it may also be a drawback because there’s no room for innovation. As you may already know, new solutions or ideas frequently emerge during development. Maybe you discover the product would be better off with different technology or a different UI design, and you want to modify what was agreed upon. Unfortunately, you won’t be able to do so because both sides have already approved the project’s details, and no additional changes can be made, especially if they go way outside the specified scope. You may be able to negotiate and get your client on board, but doing so may result in lengthy contract renegotiations and a longer time to market. In other words, a fixed rate kills the project’s flexibility.
Since a fixed-rate pricing model requires you to outline every single detail regarding the project, it can be highly time-consuming. We all know that even small projects have specific requirements and features that take time to plan and implement. Now imagine having to put them in writing, one by one, and explain exactly what each part of a product does, how it works, and why you consider it necessary for the product’s functionality. Additionally, since chances are your client doesn’t understand developer lingo, you’ll have to explain, in detail, what you will do and why you’ll do it. Doing so can help them wrap their heads around the entire scope of the project and why you’re charging a specific fee for it. And, if, for whatever reason, the client decides not to hire you after you presented them with your proposal, you’ll be left with an extensive waste of a document that took you time and effort to write out.
Extra management efforts
The fixed-rate model fosters tension and uncertainty in the entire development process because it creates an antagonistic relationship between you and your client. On the one hand, you’re trying to stick to a set budget. As a result, you’re constantly worrying about the risks this may carry for your company. On the other hand, your client is pushing for a deadline and a low financial risk that depends entirely on what you deliver and when you deliver it. As a result, you need to cope with all the risks and errors that may arise to minimize the chances of not meeting the budget or the deadline. To do so, you, or your managers, must supervise the development process closely, putting extra pressure on your developers and adding an extra load onto yourself or the project manager. Consequently, you’ll spend more money because, of course, you must compensate for these extra efforts.
All the previous points add up to one thing: reduced efficiency. And let’s face it, efficiency is crucial for successful app and software development practices, especially for Agile teams. But unfortunately, a fixed-rate pricing model is usually an efficiency killer. Sure, it can work for some teams, and it may even be the right option for you. Still, when you must analyze every change, negotiate all modifications, adapt contracts, and modify deadlines, there’s simply no way to remain productive enough to deliver a robust product and maintain the agreed-upon terms.
What is an hourly rate?
An hourly-rate pricing model, also known as time and materials (T&M), determines a rate for each hour (time) you and your team spend working on a particular project. In other words, you charge your client for the effective time you spend developing their product. Added to that charge, you also need to include any additional expenses (materials) such as fees for using frameworks and tools, buying domains or SSL certificates, and app store fees, among other costs inherent to the development process. The main idea behind the hourly-rate pricing model is to give the client a realistic product roadmap and initial estimate while also allowing the development team to have certain freedom during the development process and help you determine the product’s final cost depending on the time your team spends working on it.
Most development companies prefer an hourly-rate pricing model because it doesn’t require the price to be set in stone. On the contrary, the costs are calculated as the project evolves, which allows you and your team to get paid for the total time they spend developing a project, no more, no less, which is particularly beneficial when the scope of the project is unknown or when the project’s size is considerably large. Moreover, this pricing scheme works wonders for Agile teams as it allows flexibility and freedom to promote the cross-functional workflow inherent to this development methodology.
Pros of an hourly rate
Why should you choose an hourly-rate pricing model? Here are some of the main benefits charging by the hour can bring to your company and your clients.
An hourly rate model keeps the project highly flexible and open to change. Since the project’s scope doesn’t have to be established from the start, charging an hourly rate allows you, or your client, to efficiently react to any changes in the market that can prompt you to modify some aspects of the product to adapt it to said changes, when and if necessary. Unlike in a fixed rate, these changes don’t affect any contract or break any agreement. Moreover, an hourly rate in Agile teams allows for the pliability needed to promote efficient cross-functional teamwork and lays the groundwork to help Agile frameworks such as Scrum to thrive.
An hourly rate scheme allows you to simplify the initial interaction with your client because you don’t need to present them with a detailed, step-by-step, complicated long-term plan. You obviously have to give them your idea and the product’s primary characteristics in writing and have a roadmap for your development team. Still, you don’t need to plan out every detail. You can have an easy start, allowing your team to begin working on the project sooner, saving valuable time. Moreover, the flexibility given by an hourly rate means you don’t have to waste valuable hours worrying about abiding by elements that are set in stone. On the contrary, you and your team can work with a certain freedom that enhances productivity and increases efficiency significantly.
It may seem like charging an hourly rate leaves you with the burden of maintaining the trust between you and your client and increases the chances of having misunderstandings regarding billable hours. After all, your client isn’t there to monitor every minute you spend working on their project. But the truth is that typically, developers use time trackers that register their activity and help bill their clients accurately to avoid overcharging and overpaying. For transparency’s sake, these time trackers help both parties keep an eye on the time spent implementing certain features so you can show your client exactly what they’re paying for.
When you start working on a project with a signed contract that lines out the full scope and specifications of a product, you’re making all the crucial decisions at the beginning when you may not be aware of any variables that may affect your process later on. As a result, your team’s efficiency may be impacted because changing features or requirements later can be cumbersome, time-consuming, and costly. On the contrary, with an hourly rate, you start working with a general product roadmap and key features and adjust as you gather feedback and other valuable information to help you shape the product accordingly. This way, your team’s efficiency isn’t hindered by limitations, contractual or otherwise, and you have the freedom to build a robust, wholesome, and innovative product.
Cons of an hourly rate
Even if charging an hourly rate is the preferred pricing model by most development companies, it still has drawbacks that you need to consider before making any decisions. Here are the most prominent ones.
Being able to start the project without establishing a set-in-stone contract can be a valuable benefit. However, if your client needs a final price to plan their budget, this lack of detail can make it extremely hard for you to give them the exact final cost of their product. Sure, you can try to provide them with an estimate, but it’s impossible to pin down a set price when you can’t predict all the changes you’ll need to make.
The freedom to modify details and implement as many changes as you need is an undeniable perk of using an hourly rate. Nonetheless, you’ll be sacrificing deadlines. Sure, deadlines aren’t do-or-die in app and software development. Still, they are helpful for clients to establish when their product will hit the market so they can prepare release events, marketing campaigns, and everything this implies. Unfortunately, an hourly rate hinders this process; you simply can’t know precisely when you will deliver the product. For instance, you can estimate the project’s completion for three months, but the client changes the scope several times, pushing back the delivery date.
So, which one should you choose?
So there you have it, all the relevant information regarding fixed and hourly rate pricing models. Now, to the good part, choosing! When selecting one of the two billing methods, you must first assess the product’s requirements, your client’s needs, and your company’s principles and policies. Remember, not all clients and products are the same. What may work for one may not work for another, so do your research and choose wisely. Still, there are some scenarios where one may outweigh the other. Here they are.
When to go for a fixed rate?
Small projects: Small projects typically do very well under a fixed rate because they’re simple, don’t require too much functionality, don’t take too long to finish, and if you’re an experienced developer, you’ll have a pretty good idea of the time it will take you to complete them.
Well-scoped projects: A fixed rate is ideal for projects where you have absolute certainty of their scope, requirements, features, and deadlines, and there’s no possibility of this changing.
Fixed-budget projects: When clients have an immovable budget, charging a fixed rate can help them feel more comfortable and give them the financial certainty they need.
When to go for an hourly rate?
Agile development: If you work under the Agile methodology, then an hourly rate is always the way to go due to its flexibility and efficiency.
Unfamiliar projects: Hourly rates are ideal when working with projects you’ve never worked on or requiring you to use unfamiliar tools or frameworks. In these types of projects, you simply don’t know how long it’ll take to finish the product, so you don’t want to charge a fee that will likely change down the line.
Open-scoped projects: Hourly rates are ideal for unstructured projects which don’t have an established scope and require you to add or remove features and functionality depending on your expertise, market changes, or any other practical or subjective considerations.
No budgetary limitations: When your client doesn’t have a set-in-stone budget and is willing to remain financially malleable, charging an hourly rate is the best way to ensure you deliver the best product for their buck.
Deciding to build an app and hire developers is no easy feat, especially for small companies and inexperienced startup owners. There are many questions and doubts regarding where to begin, who to choose, and how long it will take to finish. However, one of the most pressing questions entrepreneurs face is what developing their product will cost and how they will pay for it. Sadly, Google is often their best friend, but it’s not a very wholesome source of information regarding app development pricing. Therefore, it is our job as developers to present our clients with a pricing model that suits their needs and matches their expectations so they can thrive and we can help bridge the asymmetric knowledge gap that exists between them and us. This way, hiring a development partner will eventually become an enjoyable endeavor, and business owners will have the knowledge to choose the best development partner for them.
If you’re looking to make an idea come true, we’re the answer to your questions! So just drop us a line, and let’s get started right away!