mobile-apps, software, web-development, entrepreneurism-abroad, pricingI’m starting a company in Spain that will provide a software factory model for client-specific web and mobile app developments. For the development we are outsourcing to experienced third-party soft.development companies in South America. The idea is to provide a good quality/price balance for software development and to provide the customer relationship and project management service directly in Spain (in a face to face fashion).
The question is how to calculate or find a good fee for development hour cost that allow us to provide a competitive service in price?. Is there a known rule of the thumb for defining this price?
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For a project-focused company (as your comment clarifies), customers often value fixed price / fixed outgoings agreements. So I would start by looking how to price those.
Fixed price agreements have at their core a scope document, list of deliverables, delivery schedule, acceptance criteria and payment schedule. From a pricing point of view, your upper bound is your best answer to the question, “what value does the client place on this project?” and the lower bound is either “what’s my lowest risk-free cost?” or “what’s my lowest cost, factoring in a risk premium?”
Because you’re aiming to lower the cost of quality, but not to compete with full offshoring, you want to add in some more measures. The “cost plus reasonable return” for a local provider is another figure you want to come in significantly below, and the credible lowest quote is a figure you want to be significantly above.
So your pricing strategy job is to try and characterise these figures and the relationship between them, to inform the front end of your business. It may be that for the kind of work you’re likely to be asked to look at, you’re boxed in to a fairly narrow range, then you can use the headline messages (significantly cheaper than local providers, better than offshore) as part of your pitch, because your discretion is small. If on the other hand there’s a bigger range, then good pricing is a combination of a simple positioning that keeps you competitive and profitable, plus a negotiating framework that allows you to win business profitably at other price points.
In fixed price, early days you’re likely to be back-to-backing customer and suppklier agreements, but as you grow in experience you have the opportunity to improve profitability by absorbing more of the risk as you become better able to manage it from your vantage point between the client and the main delivery team.
Fixed outgoings agreements sometimes come in with agile practice, with a fixed price per unit of time, or less often price per feature or price per some other measurable item. You’re still likely to find most or all of the trappings of traditional projects, because commercial practice is slow to change. Just be careful that you aren’t caught out by acceptance criteria that don’t line up with the flexibility of an agile project.
This is definitely an area where I would encourage you to price on a “value minus” basis, where you are clear how the project will drive value for the client, and the “minus” is the lowest percentage that reflects a clear return for the client plus a clear price advantage over local providers. That fits my rule that “the best price is the highest effective price.”
Pitching profitably while giving the customer great value gives you more opportunities to over-deliver value through the project, increasing the chance of follow-on work or of being exposed to other opportunities.
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