5 Key Reasons Why Startups Must Choose Time and Material Pricing Model While Building Their Product

The situation in most startups is tight in terms of finances, time etc. during the initial years. The first few years are when the strive to prove the worth, uniqueness etc. pushes the limits. All works well if the results are good and the remunerations (yes that’s right!) are justified. But, then again, the pricing model makes a huge difference when it comes to making the product worth the efforts, time, labour and expertise invested.

Pricing models unlike other models in the ever-transforming market evolve at a slower pace. However, in recent years the time and material pricing model has come to fore in lieu of its former fixed price model (not that it has been replaced entirely).

Before getting into why startups must choose time and material pricing model while building their product, let’s look at how the two models differ.

The fixed-price model is based on the estimated work to be done. It is a single-sum contract where the provider has to complete the project for the agreed sum within the pre-determined time. This works well in cases where requirements, specifications, and rates are set on stone and variables are out of the question. However, this model requires long-term planning and doesn’t consider the changes in the market (variables) that can affect product development at any point and time. The model hence is quite rigid.

Time and Material Pricing Model (T&M) on the other hand is a model wherein the customers or clients regularly pay for the work completed, i.e. hourly rates. Pricing is based on the number of hours spent on a specific project, and the material cost is added to it. T&M model is flexible and provides the opportunity to adjust requirements, change directions, replace features etc.

Now let’s look at the 5 reasons why startups must choose time and material pricing model while building their product.

  1. Flexibility

The foremost reason for of using a T&M model is the flexibility it offers. The product development process is more structured as it is broken down into levels of output and it often creates an MVP (Minimum Viable Product) as a part of the stage-wise process itself. The flexibility this model offers in terms of changing/modifying the strategy, features etc. in between help in delivering a product that meets the customer’s expectations.

  1. Faster Outcomes

T&M model saves the time otherwise spent on running a detailed analysis to map the scope of the project. The project can be started early and the details can be added as the project progresses hence, ensuring faster outputs. The T&M model also involves lesser paperwork which again saves a lot of time and effort. The overall progression of the project is hence faster and so is the go-to-market.

  1. Cost-Effective

While from a customer point of view, faster output means lesser time and hence the cost in terms of hourly rates is cut down. For the startups it means faster completion of one project and moving on to the next, hence increasing the volume of work that can be undertaken. Moreover, T&M model ensures that additional efforts are always accounted for.

  1. Lesser Risk

Another reason to opt for T&M model is that it gives both the service provider/product manufacturer and the customer an option to put a stop to the project without impacting the relationship or the commitment. Some customers may want to change the concept completely after a certain point, the smaller pit stops in the project development allow them to assess how and where the changes must be incorporated, hence decreasing the amount of rework that may have to be done otherwise.

The overall product quality too is better and hence decreases the business risk.

  1. Reliable, Well-tested Output

The T&M pricing models allow to adjust the project’s requirements and mold it in accordance with the fluctuating scenarios in the market and easily add updates or features etc., hence creating a product that is reliable and up-to-date. The multi-step product development ensures that the quality is checked at each stage which results into delivering a well-tested product that meets all the industrial standards too.

While the abovementioned reasons may make time and material pricing model a great pick, there are some disadvantages too. At times the deadlines may not be clearly defined and there are chances that the product may be delayed. As there is no fixed estimate, the budget remains unfixed, which may not be a feasible option for some customers. Moreover, the Startup itself holds complete responsibility for every iteration and each stage of development. However, Time and Material Pricing Model is a great choice when the customers need flexible processes and agile project execution.

Which pricing model would you recommend or prefer? Do share your thoughts.

Author:
Lokesh has over 12 years of experience in the IT industry with demonstrated success and experience in new product initiatives, product management, solution consulting and business analysis. He has successfully built 4 products from ground up. “Champions take their chances and pressure is a privilege” is a motto with which he likes to approach everything in life. He also runs a food chain by the name of “The Egglicious Café” and can be found on weekends at the outlets experimenting with different dishes and interacting with customers. In case of any queries, you can reach to him on lokesh.kumar@knowzies.com.

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