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Stop blowing your budget: a guide on software pricing models & strategies

Business analysis

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Guide

IT outsourcing

Software development

If there is one universal truth among business owners, it’s this: everybody’s looking for the best price. No matter your size — a startup, a growing company, or a large enterprise — you naturally seek a price that suits your budget. I’m not here to tell you a good deal isn’t worth taking, but software development is a nuanced practice, so there’s more to consider beyond price alone.

To help simplify this decision (and hopefully save you some money!), I’ve put together this guide on how to price software development with the most popular software pricing strategies: fixed price, time & materials (T&M), dedicated teams, and more.

What is a software product pricing model?

A software pricing model is a strategic approach that influences everything from project timelines to the quality and scalability of the final product. The model determines the payment structure for the business — one-time payment, subscription payment, or payment based on usage. It also defines how much risk will be taken and how costs will be projected and shared so that all involved parties are safeguarded.

Software pricing models: pros, cons, and use cases

I’ve identified 7 of the most common software development pricing models you’ll likely come across. Here, we break down the differences, highlighting their benefits, drawbacks, and ideal use cases.

Fixed price

What is a fixed pricing model?

A fixed price model means the price of the software development project is agreed upon upfront, and the scope, timeline, and cost are clearly defined. This software product pricing model is typically used for projects with a well-defined scope and little to no room for changes, and it’s best for SMBs, startups, and small enterprises. Since these businesses often need to manage costs tightly and prefer predictable expenses, a fixed-price model offers them certainty and control over their budget.

Managing projects using a fixed-price model

With a fixed-price model, the client and vendor agree on a detailed project scope before work begins. Changes in scope can trigger renegotiation of the contract. Since the vendor is incentivized to stick to the scope to avoid extra costs, project management must be very detailed.

Pros

Low risk of budget overruns, as everything is agreed upon in advance

Smooth execution, thanks to a well-defined scope

Works well for MVPs and small projects with fixed requirements

Cons

Limited flexibility, meaning that any change requires contract renegotiation

May lead to lower software quality if the vendor cuts corners to stay within budget

Risk of misaligned expectations if initial requirements aren’t fully defined

Time & materials (T&M)

What is the time and materials pricing model?

The time and materials pricing model is a billing approach where clients pay for the actual hours worked and the resources used for a project. Instead of a fixed cost, the total price depends on the number of hours worked by the development team and the resources required. It perfectly fits long-term development, evolving projects, and innovation-driven companies.

Managing projects using a time and materials pricing model

In a T&M contract, the client is charged based on:

Hourly or daily rates. Payment depends on the actual time spent by developers, designers, and other team members.

Material costs. Any software licenses, third-party tools, or hardware needed for the project are covered by the client.

Pros

Adaptable to changing business needs as scope can evolve dynamically

More control over the project — you can adjust priorities based on market needs

High-quality outcomes, as development is iterative and the product is continuously improved

Cons

Low cost predictability

Requires active involvement from the client to guide priorities

Potential for inefficiency if not well-managed — continuous work can mean higher long-term costs

Dedicated team

What is a dedicated team model?

In the dedicated team model, a client contracts a team of experts that works solely on their project. This team serves as part of the client’s in-house staff in terms of being deeply committed and involved in the project.

Unlike fixed-price or time-and-materials contracts, the client pays a monthly fee covering salaries, administrative costs, and infrastructure. Companies typically need a dedicated development team for ongoing projects.

Managing projects with a dedicated team

With a committed team model, businesses are guaranteed technical mastery along with complete control over the development process. Here’s how it works:

The client and vendor agree on the required expertise, and the vendor assembles a dedicated team.

The team works as part of the client’s organization, following their culture, tools, and workflows.

The client covers the team’s salaries and administrative costs, delivering predictable budgeting.

The team remains focused on the project.

Pros

Full control over a team without the burden of hiring in-house

Long-term engagement fosters deeper business insight from the outsourced team

Better retention of knowledge and skills compared to short-term contracts

Cons

High initial cost

Requires strong project management

Works best for long-term partnerships rather than short, one-off projects

Milestone-based pricing

What is a milestone-based pricing model?

The milestone-based pricing model is a hybrid approach that combines elements of fixed and time-and-materials pricing models for software development projects. In this model, a project is divided into predefined phases or milestones, each with a set deliverable and cost. Startups and businesses seeking a structured yet flexible development approach can benefit from this model.

Managing projects using a hybrid pricing model

In the milestone-based software product pricing model, the project is structured into distinct phases, each with clear deliverables and deadlines. Costs are assigned to each milestone based on software pricing factors like complexity, required effort, and resource allocation. Payments are made incrementally, with the client paying only after a milestone is successfully completed and approved.

Pros

Balanced predictability and flexibility

Accountability, as each phase is completed before moving forward

Low financial risk

Cons

Requires clear scope definition up front

Possible bottlenecks when changes are needed

Added pressure to meet milestones on time

Value-based pricing

What is a value-based pricing model?

A value-based pricing model sets the price of a product or service based on its perceived value to the client rather than production costs or market rates. Instead of charging based on hours worked or resources used, businesses set prices based on factors such as cost savings, revenue growth, competitive advantage, or overall impact.

This model demands a thorough understanding of the client’s requirements, industry benchmarks, and the unique value proposition of the service or product. It’s best for niche projects with clearly measurable business outcomes.

Managing projects using a value-based pricing model

To implement this model effectively, project managers should:

Work closely with the client to understand their goals, pain points, and expected benefits. And clearly outline what success looks like.

Set pricing based on the perceived value of the solution rather than just the effort or resources used.

Use measurable metrics to track progress and ensure the project delivers the expected value.

Regularly communicate with the client about progress, challenges, and adjustments needed to maximize value.

Optimize project strategies to create sustainable benefits rather than just short-term deliverables.

Pros

Fostered trust and long-term partnerships

Shifted focus from price competition to delivering superior results

Drives innovation and high-impact development

Cons

Difficult to define success metrics for software projects

Complex contracts that require constant renegotiation

High risk for vendors, making it less common in outsourcing

Subscription/retainer model

What is a subscription model?

A subscription pricing model is a payment structure in which customers pay a recurring fee — monthly, quarterly, or annually — to access a product or service. Instead of a one-time purchase, clients commit to ongoing payments for continued usage, support, and updates. This model is widely used for software-as-a-service (SaaS) platforms, streaming services, cloud computing, and professional consulting.

Managing projects using a subscription pricing model

Subscription enterprise software pricing models often include tiered pricing, allowing users to choose different levels of service based on their needs. Companies may also offer custom plans or usage-based pricing with fees varying based on consumption.

Pros

Predictable, ongoing costs instead of large one-time expenses

Ideal for DevOps, cloud management, or security services

Long-term stability with continuous improvements

Cons

Not suitable for one-time custom software development

Customer churn if value isn’t maintained

High initial setup costs for infrastructure

Revenue-sharing model

What is a revenue-sharing pricing model?

A revenue-sharing pricing model involves a business and its partners or service providers sharing the revenue generated from a product or service. Instead of a fixed payment, compensation is based on a percentage of the earnings, often aligning the interests of both parties to drive mutual success. This model is commonly used in partnerships, affiliate marketing, licensing deals, and joint ventures.

Managing projects using a revenue-sharing pricing model

Managing projects with a revenue-sharing pricing model involves establishing clear terms on how revenue will be tracked, measured, and distributed between the involved parties. Success hinges on aligning incentives to ensure all participants work toward maximizing revenue.

Pros

Low upfront cost for the client

Aligns incentives — both client and vendor benefit from success

As the project or product grows, so does the potential revenue for all parties involved

Cons

Rarely used in outsourcing due to high vendor risk

Requires trust and strong legal agreements

Difficult to forecast revenue and calculate fair compensation

Not sure which pricing works for you?

Hidden costs and traps in software pricing

Businesses often focus on the initial cost of software development, only to discover hidden expenses later. Here are some common pricing traps and tips on how to avoid them.

Scope creep and change request fees

Some vendors lure clients with low fixed prices but impose high fees for any extra work. If the initial contract doesn’t account for flexibility, even minor adjustments can become costly.

For example, a growing e-commerce startup hires a vendor to build a custom website. The initial contract includes only the most basic functionality to keep costs low. Midway, the startup realizes it needs additional payment gateways and a custom product filtering system. Each small request incurs a steep fee, quickly inflating the budget beyond what they anticipated.

To avoid this, ensure clear project scope definitions, negotiate reasonable change request terms upfront, and work with vendors who communicate cost implications transparently.

The "low initial price" trap

Here’s another potential scenario. A SaaS company selects a development vendor offering an attractive low price for a new feature rollout. The vendor delivers on time, but the code is poorly structured, making future updates a nightmare. Documentation is sparse, and when issues arise post-launch, the vendor is unresponsive. That’s what the “low price trap” looks like.

What can be done to avoid such a frustrating situation? Don’t let a bargain turn into a burden — evaluate vendors based on quality, not just price. Check past projects, client feedback, and post-launch support. Remember that those initial “savings” might cost you more than you bargained for.

Lack of transparency in T&M

Some vendors bill inefficiently, charging for unnecessary time and effort. Without clear tracking, businesses may pay for delays rather than actual progress.

As an example, a mid-sized fintech firm hires a vendor on a time-and-materials basis for a regulatory compliance system. The vendor bills hours liberally but provides vague progress reports. Delays mount, but invoices remain steady.

This isn’t a once-in-a-lifetime situation — it happens more often than you’d expect. But you can avoid it by being proactive and recognizing the risks before they arise. Set clear expectations for reporting and accountability, establish milestones with regular check-ins, and agree on measurable productivity benchmarks. That way, progress stays on track, surprises stay minimal, and everyone stays aligned.

Locked-in contracts

The last example is when a retail brand contracts a vendor to build a mobile app under a rigid fixed-price agreement. Midway, customer feedback reveals the need for an enhanced user experience. However, the contract doesn’t allow modifications without restarting the project or incurring excessive costs. So, what now?

The issue with a fixed-price contract is that it doesn’t allow for mid-project adjustments, leaving businesses with two costly choices: accept subpar results or abandon the project and start over.

Negotiating flexibility for mid-project adjustments while working with adaptable vendors and exploring adaptable but structured software pricing strategies can help avoid these issues.

We’ve got all the proof you need — stellar work, happy clients, and solid support!

The business strategy behind choosing the right pricing model

Selecting a price model revolves much more around a company’s strategy as well as economics. This decision dramatically impacts parts of the business, such as how and if they can scale, how innovative they can be, and the overall success of the projects in the long run.

How enterprise software pricing models influence scalability, innovation, and cost control

Different software development pricing models align with different stages of a business’s growth. For example, a fixed-price model can help businesses control costs in the early stages by offering predictable expenses. However, as businesses scale, particularly those in rapidly changing fields like SaaS or AI, flexibility becomes essential. Fixed-price models can stifle innovation since they don’t account for the need to pivot or adjust features as the business evolves.

On the other hand, time-and-materials or value-based pricing provides more flexibility, allowing businesses to incorporate changes and scale faster. This flexibility promotes innovation as the vendor and client can adjust the scope without being held back by rigid budgets. While these pricing models for software can be harder to manage financially in the short term, they often foster long-term growth through more adaptable and customized solutions.

Predictability and flexibility in budgeting

Fixed-price contracts offer predictable budgeting, which is ideal for well-defined projects with clear deliverables. However, they can be limiting when it comes to accommodating scope changes or unexpected needs. For a company focused on cost containment, a fixed price offers the safety of no unexpected charges, yet it might hinder new ideas and improvements.

T&M pricing might be the best when it comes to flexibility. The reality is while T&M pricing provides the freedom to adapt, it can also lead to budget fluctuations. This unpredictability can cause budget overruns if progress is slower than anticipated or if the scope shifts. However, for businesses that value long-term innovation and ongoing improvement, this pricing model can provide the chance to grow without being stifled by an inflexible contract.

Vendor relationships

The pricing is not just about numbers. The chosen pricing structure also impacts vendor relationships. Thus, a fixed-price contract creates a clear-cut, transactional relationship, which might work well for a one-time project but can strain long-term collaboration. As the scope expands or changes, the relationship can become more contentious if the vendor feels underpaid or overburdened by scope creep.

Conversely, models like T&M or retainer-based pricing foster a more collaborative relationship, where both the business and vendor share a long-term vision. Continuous feedback and adjustments are very welcomed in terms of these pricing models for software development projects. But (there’s always a BUT) the challenge lies in maintaining clear communication and setting realistic expectations. With ongoing adjustments, it can sometimes feel like the scope and costs are constantly shifting.

“Every project is unique, and a reliable company should offer pricing that works for you. That’s why Innowise keeps software pricing flexible — fixed-price contracts for predictability, time-and-material for when things need to adapt. With years of experience, we guarantee you stay on budget without the headaches”

Siarhei Sukhadolski

FinTech Expert

How to choose the right pricing model for your project

Choosing the best pricing model for your project is challenging because no single approach will work for everyone. The optimal choice relies on your individual goals and opportunities. The following steps will aid you in making a more optimal decision.

Step 1: Assess the project’s scope and clarity

If you have a clear vision of the deliverables and the project requirements are set, a fixed-price model can be the best fit. This option offers predictability and helps control costs since you agree on a price set upfront.

However, if the scope is uncertain or you expect frequent changes, a time & materials model would be a better fit. With T&M, you pay for the actual time spent and materials used, making it more flexible for evolving requirements or unknowns in the project.

Step 2: Evaluate project duration

If it’s a longer-term project or you need specialized skills on an ongoing basis, a dedicated team model may be your best option. With this model, you hire a team that works exclusively on your project, ensuring continuous support and flexibility to scale resources as needed.

For projects that require consistent, regular support or maintenance over time, the subscription/retainer model is ideal. This approach gives you access to ongoing services for a set fee, providing stability and support over an extended period.

Step 3: Consider flexibility and evolution

If your project will evolve in scope or require frequent adjustments, the time & materials model offers the flexibility to adapt as you go. This model is well-suited for projects with an unclear initial scope or those that are likely to undergo frequent changes.

Alternatively, if your project has clear phases but you still need some flexibility, milestone-based pricing might work better. This model ties payments to the completion of specific project milestones, ensuring progress is tracked while allowing for adjustments as needed.

Step 4: Focus on results and value

If your project’s success is primarily based on achieving specific business outcomes — such as revenue growth or improved operational efficiency — then value-based pricing is the most fitting option. With this model, the cost is tied to the results delivered, aligning the interests of both parties toward a mutually beneficial outcome. This approach is inherently efficient, provided that both sides are focused on measurable impacts and outcomes rather than just deliverables.

Step 5: Risk and cost management

Finally, consider how you want to manage risk and cost. If you need to maintain strict control over your budget, the fixed price model provides certainty about total costs. This is ideal for projects with a clear scope and minimal expected changes.

On the other hand, if you prefer flexibility and are comfortable managing costs as they accrue, the time & materials model offers a way to pay for actual work done, with the trade-off being less predictability.

The best model will depend on your project’s unique scope, risk tolerance, and long-term vision. To see how we approach these decisions, take a look at how we work at Innowise.

In conclusion

Choosing the right enterprise software pricing for your project is all about finding what fits you. Break down the different options, weighing the pros and cons for each scenario. Stay flexible and open to adjustments, but never lose sight of your key priorities.

One small note here: when you align your vision with a trusted partner, the path forward becomes clearer, and the project becomes more manageable. Find a reliable partner — Innowise can be the best choice — and discuss every concern no matter how small.