Our Pricing

Aligning for growth with value-based pricing

Every system is perfectly designed to get the results it gets.
— W. Edwards Deming

Outsourced software product development has largely been unsuccessful. We think that the traditional charge-by-the-hour pricing model is a key reason for this. Software services firms are more interested in maintaining high utilization and maximizing “billable work” often at the expense of generating value for their clients.

Imagine a 2x2 diagram of software products based on their value (revenues or potential for revenues) and cost (effort to build and maintenance complexity). Standard cost-plus-margin pricing models reward the software vendor to build products that are expensive to build and maintain. On the other hand, profitable products for clients are low-cost high-value products.

The conflict between client and vendor profit motives in cost-based pricing models

The lack of alignment in profit motives between the client and vendor usually results in failure. A software vendor that bills by the hour is rewarded to do things inefficiently, allocate less skilled resources who take longer, jockey for unnecessary features, and so on. The information asymmetry in a client-vendor relationship, coupled with the high costs associated with switching vendors, further enable such inefficiencies.

In startups, employees understand that their stock options are not worth much when the startup fails. Whatsapp could manage 900 million users with just 50 developers. On the other hand, an IT services company like Accenture or Deloitte, would consider a 50-person project to be relatively small and certainly insufficient to maintain a product with close to a billion users. We believe that a value-based reward system, similar to stock options, is necessary for vendors to stay aligned with the client’s goals in the medium-to-long term.

Our projects typically shift to a value-based pricing model, such as revenue sharing or use-based retainers, once the MVP gains traction and the engagement moves to the growth phase. During this phase, value-based pricing helps the client and vendor focus on what is important: building profitable products.