Pricing models in web service renewal

When planning a web service renewal project, it is crucial to take a deep dive into pricing models during the procurement preparation phase. One of the most important decisions in this process is choosing the appropriate pricing model, as it impacts project costs and scheduling. In this article, I will examine three common pricing models: fixed-price, target-price, and agile hourly-based models.

Fixed-price model

The fixed-price model is based on a predetermined price given in the proposal, which covers the entire web service renewal project. In this model, the price remains constant regardless of the amount of time and resources the project ultimately requires. The fixed-price model provides a clear picture of the project’s total cost from the outset.

The fixed price for a web service renewal is given based on the needs and requirements defined in the request for proposal (RFP), so the definition must be thorough and contextually appropriate to cover all aspects of the project and the new web service. I have previously written about the importance of requirements definition in web service renewal on the Redandblue blog, so check out the article for more details on this topic.

The fixed-price model is most commonly used in public sector web service procurements and is less common in other sectors today. It’s worth noting that the fixed-price model is not the only option in the public sector, but it is often preferred due to its familiarity and the clarity it brings to the procurement process.

Pros and cons of fixed-price web service renewal:

+ provides visibility into costs for the client
+ requires professional and contextually appropriate requirements definition during the procurement phase
+ makes procurement and project management straightforward
– does not easily allow for flexibility and changes within the project
– disadvantageous for the supplier if the amount of work turns out to be greater than expected
– requires commitment from both the supplier and the client to adhere to schedules and processes to stay within budget

Target-price model

The target price model is based on a target price provided in the proposal, determined from the requirements specification in the request for proposal (RFP). This price generally covers all tasks in the design and implementation phases. The target price model is a slightly more flexible variant of the fixed-price model.

The target price may change depending on how the project requirements and objectives evolve. This model offers more flexibility compared to the fixed-price model, but the client must be prepared to adapt to changes during the project. At our company, the target price is reviewed at the end of the web service design phase, once the requirements and needs have become clearer. This ensures that the final target price for implementation is accurate after the design phase.

Example of the target-price model for web service renewal:

• A binding target price is provided for the project, based on the RFP’s requirements specification and the supplier’s unit prices in the offer.
• The target price/work estimate is reviewed after the web service design phase to ensure it is as accurate as possible.
• Hours worked are recorded, and work is billed according to the actual completion on a monthly basis.
• Invoicing is done monthly based on unit prices until the agreed target price is reached.
• If the project is completed before reaching the target price, the supplier receives a bonus, such as 30% of the savings.
• If the target price is exceeded before the project’s completion, additional work hours are billed at reduced unit prices (e.g., 70% of the standard rates).
• A cap budget can be agreed upon in the target price model.

The target-price model is currently the most frequently used model in Redandblue’s web service projects. If you want to know how we typically apply this model in our projects and what our clients have to say about it, please fill out the form at the end of the article. Thanks for reading the article so far!

Agile development model

A web service renewal can also be carried out using an hourly-based agile model. This model offers the greatest flexibility and allows for changes to be made throughout the project at each stage. Pricing and monthly billing are based on actual hours worked, making final costs harder to predict. However, the project can still be guided by a requirements specification and work estimate, which provide predictability for the procurement while not limiting project changes.

The agile development model is more adaptable to continuous development of the web service compared to fixed-price and target price models. Agile development often requires a shift in mindset from the entire organisation or at least the team responsible for the web service renewal to ensure that development does not stop after the initial launch of the new web service.

Comparison of pricing models from the client’s perspective

Pricing models for web service renewal can be evaluated from both the client’s and the provider’s perspectives. Here, I will highlight the advantages and disadvantages of different pricing models from the client’s perspective.

Fixed-price model

For the client, a fixed-price model can provide cost predictability but often limits flexibility regarding changes, making it more challenging to incorporate modifications into the project. A fixed price can be a good option if the project’s requirements are crystal clear, suitable for the context and chosen provider’s solution, and stable from the outset of the request for proposal (RFP). In other words, the RFP phase requires more effort to ensure that there is clarity about what is being procured and from whom.

Target-price model

The target-price model is worth considering, especially if there is flexibility in the project’s budget. This flexibility allows for more thorough quality assurance and potentially more revisions during the design phase than initially anticipated. With the target price model, you can encourage potential providers to contribute their expertise more willingly, particularly when the RFP includes partially open-ended requirements.

The target-price model relies on the client’s requirement specification, and it is also possible to set a cap budget, making it a highly recommended option for the client from multiple perspectives.

Agile model

The agile, hourly-based model offers the greatest freedom for creativity and flexibility regarding changes, but it can be more challenging to manage from a budget perspective. A website redesign using the agile model often avoids compromises, leading to outcomes that are generally most favourable for the client and the client’s end-users/customers. The agile model may require the client to allocate a substantial annual development budget, but with the right approach and data-driven development, the model can maximise the benefits of the website.

Comparison of pricing models from the supplier’s perspective

The fixed-price model is advantageous for suppliers in that it guarantees revenue from the start to the end of the project. To make a fixed-price project profitable, the supplier must carefully estimate the time and resources needed to ensure the price is realistic. This can be challenging if the request for proposal (RFP) contains gaps or is unclear.

The target-price model being the case, the supplier can more readily demonstrate flexibility and willingness to make necessary changes throughout the project. During the project, the supplier has better opportunities to refine the website’s concept and specifications with the client, as the overall budget is not fixed.

The agile model can be highly favourable for the supplier, as it allows billing based on actual hours worked. However, this requires the supplier to provide more reporting and transparency to the client. For example, if the supplier can complete a fixed-price project more cost-effectively than the offered price, this does not impact the total billing for the project, so the project’s profitability would be better than for an hourly-billed project.

Make a careful evaluation of the pricing model

The final choice of pricing model depends on the project’s requirements, goals, budget and schedule flexibility, and the relationship between the parties. It is important to carefully consider which model best suits the situation and needs. It is not necessary to lock in the pricing model at the RFP stage; instead, request proposals from suppliers and agree on the model with the chosen supplier.

Want to know how much a website redesign would cost with Redandblue and which pricing model to use? Contact us using the form below to discuss pricing in more detail.