Pricing models are implemented in IT industries on their projects and development works in a way which suits specific budget and cash flow requirements of an organization. The primary motive of these methods has always been cost effectiveness.
Different pricing models are essential to decrease the complexity created by the extends of different projects. Each pricing model forms a successful sort of agreement with the outsourcer and the service provider. The needed can choose the model that suits their requirements. To obtain the maximum benefits from the aimed project various pricing models are implemented now.
Let’s have a look at the various pricing models:
- Fixed Cost Pricing Model
A fixed price model is the most common model used in the outsourcing industry, for which the price is set during the start and the project is delivered within the fixed schedule. This model is mainly utilized when all the requirements for the project are well set and the process will not accompany any changes in the go. The process involves inquiry, negotiation, a final proposal and agreement between the parties. Various benefits associated with fixed pricing models are:
- Clarified Requirements
The requirements of the project are well defined which describes the ease of flow.
- Predictable scheduling
Scheduling aspects are fixed accordingly and hence the pattern flows in the defined manner which makes the project well predicted.
- Less supervision required
The above-told pre-defined project flow makes the supervision to the minimum hence making the clients concentrate less on the reported tasks
- Risk factors are low
Lesser risks are involved as there exists no complexity in the services provided and thus unwanted deviations can be avoided.
- Known Capital
The capital required for the project is known from the schedules and it will be fixed until the delivery.
- Clarified Requirements
- Time and Material Pricing Model
Another popular pricing model used in IT industry is the Time and Materials model. More suited where the predefined end is still not available and when slight changes in instances are required. This is based on the time and material used in the completion of a project. This model can be completely altered according to the time classifications, like hourly, daily, weekly basis.
This type of models can be implemented for maintenance and support based projects. The major benefits associated with these pricing models are,
- The development is incremental as it is decided by the aspects that arise when some particular changes occur in the flow of the project.
- As the requirement variation is high, it mainly focuses on the projected growth rather than the fixed schedules.
- Strong project management teams and methodologies are implemented to monitor and track the project’s progress on dimensions of schedule, scope, cost, quality, and productivity.
- Skilled resources are locked for the entire project duration, so competencies and skills can be built over the time as the scope of the project is not really defined.
- Mixed Mode Pricing Model
An ideal implementation of both the above told over situations where your requirements are not specific but the need for maintaining a strict time frame is essential. The mixture of both the Fixed price model and the Time and materials model, known as the mixed model use the maximum advantage of the gains of the fixed model associated with the clarified requirements and that of T & M model with all other factors. The model comes with many benefits like:
- Time frames generated will be having better control and can be easily managed with better supervision.
- Helps in saving the costs associated with unplanned project schedules, thus results in reducing the gross total cost in the project.
- Receives the advantages of both the above-told models.
- Staff Augmentation Pricing Model
A pricing model that needs better and skilled resources for maintaining and supporting the project. The requirement variation associated with this kind of model is quite high and it does have dynamic but rather strict timelines. Also, the client supervision required for the above model is quite high compared to the others. When it seems that you need to add some extra staff for promoting support for your project, you choose the staff augmentation model and over this method, one can effectively make use of the dedicated team given for the decided time span and with your total control over it. Various advantages related to the model includes,
- The monitoring of the team will be more and hence the total control will be better compared to other models.
- Alterations, as needed, can be implemented on the team as per the requirements, that is if the need for any special skilled member for the project at any particular situation is acceptable at this point.
- Addition according to the client needs helps in attaining the result even when the timelines are critical.
- Delivers a major role in reducing the overhead charges associated with the project
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- Consumption-based Pricing Model
This is a highly dynamic model in which the costs are allocated based on actual resource usage. This model is highly suited for outsourcing organizations that have to contend with issues, such as service provider productivity and variable demand. This model is well suited to situations where the fixed costs could be shared across many customers. Consumption-based pricing delivers substantial productivity gains and makes cost structure analysis and adjustments relatively an easy task. Furthermore, this model converts capital expenses into operating expenses.
- The models help in delivering a fair and accurate prediction of demand.
- Sometimes it encounters an issue with changing demand pattern, it is a challenge to predict annual growth rates.
- Gain-sharing Model
This sort of pricing model is an outcome-based model. It can also be called as a profit sharing model. The model delivers out of the box gains to the service providers that can include incentivizing and rewarding for increasing the overall value delivered to the outsourcing organization. This model is highly unsuited in the condition where cost savings are the main fulcrum of an outsourcing engagement. A few benefits associated with this model can be,
- Encourages and empowers service providers to get more engaged in creative aspects related to the project success as they work with the client organization towards achieving mutually beneficial business goals.
- Helps in achieving better tactical and strategic business results.
- For this kind of models, a high level of trust exists between the participating organizations, equal distribution of risk and reward, and significant upfront investment are usually ensured.
- Shared risk-reward Model
Shared risk-reward Model is a pricing structure in which the additional payments are decided from the detailed objectives that define the project outcome. This model is usually employed in situations where the service provider and client jointly fund new product or service development. Both the provider and the gainer shares the rewards for a fixed period of time. Few details about the Shared risk-reward Model are,
- The rate of monitoring and evaluation tends to increase in this type of model without any compromises.
- Sometimes third parties are involved to rectify issues from conflicts created between the participating organizations.
- The governing capability required for this kind of model seems to be more and it mainly facilitates joint venture or partnerships.
- Hence the organization should share both faces of the coin with the partnering organizations.
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