As with the cost of so many goods and services we buy, the price of digital product development varies widely depending on a number of factors. And there’s no such thing as one-size-fits all. There are too many different product types, development firms, pricing models, and contractual arrangements.
If you’re a first-time purchaser of custom software development, it’s normal not to know what building your idea or app will cost. But you can get a better idea of what you might expect to invest by pinning down a few variables.
This explainer will help you identify those variables as you consider which type of firm is right to help you realize your project — and what kind of investment you can expect.
What You Are Building Helps Determine a Price and the Right Development Partner
Your overall investment often comes down to the question of uncertainty.
The level of uncertainty is a measure of how sure your organization is about what it needs to build. Start by ranking your product on a simple uncertainty scale of low, medium, or high. The levels themselves don’t matter: low is no better than high, and more uncertainty is no worse than less.
However, identifying if your uncertainty is low, medium, or high is instructive and can help you determine the type of development firm that’s right for you. Different levels demand different strengths from a design and development firm.
A lot of buyers evaluate development firms based on process, quality, and reputation–all of which are important–but have no category for thinking through the level of uncertainty. In our experience, fit based on level of uncertainty is the most important factor in selecting the right kind of design and development partner.
The levels break down like this:
Low Uncertainty: Execution-oriented.
In low uncertainty projects, what will be built is already known at a fairly high level of detail. For example, developing a back-office application to replace a legacy system. You know your users, their needs, and the specifications of the system well. A good execution-oriented development firm can deliver this kind of defined application efficiently and with high quality.
Medium Uncertainty: User-Oriented
In medium uncertainty projects, what will be built is largely known, but there’s room for improvement and innovation. For example, developing a next-generation customer platform for an existing business. You know your customers and the current system, but to truly succeed you need to adapt to changes in user needs, context, and technology.
Here building the right thing requires interviewing and observing customers beforehand, regular user testing throughout, and some emergence of features and user experience. In this instance, an execution-oriented development firm could deliver a working application but will miss many opportunities along the way.
This work is best suited to a firm that has development strength but also UX and Product Management capabilities.
High Uncertainty: Product-oriented.
In high uncertainty projects, what will be built is significantly unknown. The organizational strategy and goals are known, but exactly how to get there is not. High uncertainty projects include developing a digital product for a new business or new customers, or transforming an entire digital experience.
Building the right thing requires deeper levels of upfront research and strategy, exploratory design and testing, and iterative design and development execution. This level of uncertainty is best suited to a firm that has strategy, research, design and development strengths and is accustomed to working on high uncertainty initiatives. Selecting an execution-oriented development firm for this kind of project typically leads to disaster.
Every Firm Has Its Own Approach to Pricing
Put simply, less expensive firms are more suited for low-uncertainty projects where you can tell them exactly what to build and they can focus solely on execution. More expensive firms are better suited to higher-uncertainty projects where they are using research and prototyping to guide the shape and strategy of the product.
Once you are settled on your certainty level, you can begin to get a sense of price ranges as a function of the kind of firm you are working with.
Here are some pretty typical ranges for the different types of development firms:
- Overseas execution oriented firms are $15-$75 per hour. The lowest rate firms tend to just throw people at projects and, as a result, aren’t always less expensive than using more experienced people at execution oriented firms overseas or in the United States.
- Execution oriented firms in the United States are around $100-$150 per hour. Software here should generally cost $100,000 or less.
- User-focused firms range from $140 to $200 per hour. Software here is highly variable, but usually range from $100,000 to $350,000.
- Product or customer-focused firms range from $180 to $250 per hour. Products are also highly variable, but usually range from $250,000 to $800,000.
Your Development Contract Influences the Final Price
What you pay for your digital product is also a function of the contractual relationship you have with your developer. While hourly rate prices are the norm in development, there are other pricing models. Your organization and the development firm should agree on the contractual model they are using and why.
Here are some of the typical models:
Time & Materials
The time and material model is most common by far, presented as either hourly, weekly, or monthly rates, both per person and as a collective team. There are several strengths to this model: cost is transparent throughout and roughly corresponds to effort, and your organization owns both the reward and risk of building software and executing the strategy that software supports.
There is also a glaring weakness: inefficient development teams are rewarded with additional revenue, while highly efficient work from a development firm actually results in less compensation. That being said, this model roughly — though imperfectly — aligns the buying organization and the development firm.
Fixed Price, Fixed Scope
The fixed price and fixed scope model documents exactly what will be built beforehand and attaches a fixed price to that specification.
This almost never works. A fully fixed project either ends up in a product that strictly delivers against your first idea–ignoring all learning and improved ideas along the way–or results in a whole bunch of change orders — which means it isn’t fixed at all.
Fixed pricing just isn’t realistic. You are putting a price on something at a moment where you will never know less about what you are building. Then as the project goes forward, you either keep building no matter what, or both parties engage in an ongoing series of change orders.
Fixed Budget, Flexible Scope
Fixed budget and flexible scope sets a fixed investment based on the initial specifications and similar projects, and then allows the scope to flex within that budget along the way. This sets a budget for the product — giving you confidence in the investment needed — and it allows you and the design and development firm to always ask: “What is the most valuable way to use this investment?”
This provides space for continual learning and change, which is crucial, while still keeping investment predictable. We think this is the best of both worlds and our preferred model.
We believe this approach is particularly important where usage success is not guaranteed. If you want your customers to buy your digital product and use it, that’s never a slam dunk. This gives both parties the flexibility to follow the most promising path to success.
A Clearer View on Pricing Can Help Get You Started
As you can see, there are a number of variables that go into determining the cost of developing a digital product. Having clarity around those variables at the outset can help you determine what type of firm and pricing approach will work best for you.
If you’d like to learn more about how Highland prices its services and works with clients to deliver success for their digital product, we’d love to hear from you.
