In product development, there are different types of pricing models to choose from. And today, we are going to understand what it is and why businesses use it.
What is a Fixed Cost Model?
The fixed cost pricing model is the model that guarantees a fixed budget for the project, irrespective of the time and expense incurred.
For small and medium-sized projects where requirements, specifications, and schedules can be precisely defined before the project development process begins, the fixed pricing (also known as project-based) model is ideal.
Given the clear criteria and tried-and-true project management practices, the fixed pricing model offers low risk for the customer. However, any modifications to the features or scope made after the contract are signed would need a change in both the cost and the delivery date. Therefore, it is crucial to go over every detail and determine the appropriate cost for project delivery right away.
Periodic payments can be arranged between the client and the service provider. During the project development process, the agreement may define what fixed portion of the overall cost the client is responsible for upon completion of each milestone or interim delivery.
In general, fixed expenses are indirect because they have nothing to do with the creation of any goods or services by a corporation. Shutdown points are frequently used to cut fixed costs. These expenses are one of two different business expenses, the other being variable expenses, which combined make up their overall expenses.
Stages of a fixed price model
The following stages are included in the model based on fixed time and price, and it is simple to understand:
- A request and project specifications are sent by the client.
- Each detail is negotiated by the service provider and the client.
- The final proposal, billing, and timetable are sent by the service provider.
- Project development starts after negotiations between the two parties.
- A completely implemented solution is provided by the service provider.
- The project has the client’s approval.
The service provider must be extremely professional while using a fixed-price approach. Unexpected changes and challenges must be overcome without incurring additional costs or losing money. Since the outsourcing organization is responsible for taking on all the risks associated with project implementation, it must offer skilled project management, effective monitoring, quality assurance, and cost control.
When do you need a Fixed Cost Model?
Understanding when and when to apply the Fixed pricing model can help you put money toward realistic solutions and lower the likelihood that you’ll be unhappy with the outcome. This methodology is useful in the following scenarios:
- You are concerned with the end result and not the means by which it is obtained.
- You can describe your project requirements in easy and acceptable terms with detail.
- You do not have the time to supervise the project.
So, these are some of the scenarios when a fixed pricing model is helpful. It ensures that the cost of development does not get completely out of hand. It is particularly useful for businesses on a tight budget.