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Value-Based Pricing For Your Tech Services 2: Pricing Models


A hand holding a pen signing a contract while another hand points to where it should be signed.

In our previous article, we gained an understanding of value and how it relates to price. This article describes the most common pricing models you will use in your tech services.


Hourly Pricing

Hourly pricing is as straightforward as it gets. But underpinning the hourly pricing is a cost-plus model. Hourly pricing focuses on the cost to the provider or person-hours rather than the value delivered or outcomes. But it is a good starting point.

Vendor

Customer

Pros

Easy to implement

Easy to understand

Scoping is lower stakes

Flexibility to address changes

Cons

Higher hurdle for proof of competence

Fewer assurances on time and cost

Cost-based pricing and lower margins

Usually lower pricing

Maintaining the relationship may still require the vendor to assume responsibility for scoping mistakes despite the contractual standing


Project-Based Pricing

Project-based pricing revolves around a fixed cost for a fixed scope for a project. This model offers predictability and a clear focus on outcomes for the customer. It gives customers clarity and confidence in the costs, but the company assumes more risk. But the most significant risk is expressed in the Agile Manifesto as "Customer collaboration over contract negotiation."


Vendor

Customer

Pros

Scope and fixed-price acts as proof of competence

​Clear understanding of costs

Presumption of risk allows you to increase price to command a higher margin

Increased efficiencies are extremely lucrative

Cons

Scoping processes need to be strengthened

The vendor is incentivized marking completion, not project success

A scoping mistake can destroy margins

Can create a false sense of security

Change requests need to be aggressively managed

Cashflow is worse because it is dependent on completion



Milestone-Based Pricing

Milestone-based pricing applies the lean principle of smaller batch sizes to the project-based pricing model. This approach offers a balance between flexibility and structure, allowing for payments to be made upon the completion of specific agreed-upon phases and for making adjustments as we move forward. Agile contracts are an example of a milestone-based model.​​

Vendor

Customer

Pros

Consistent cashflow

Flexibility to readjust strategy

Scope change translates to an increased revenue opportunity

Address the underlying problems in both fixed and hourly pricing head-on

The risk from scoping mistakes is greatly reduced

Cons

Need strong product leadership for the duration of the project

Fewer guarantees on costs

Harder to understand


Subscription

Subscription pricing is an ongoing, periodic charge that provides customers with services and support. This model encourages long-term relationships and can lead to a stable, predictable revenue stream. It's ideal for services that require continuous upkeep, updates, or regular input. For the client, it ensures both ongoing and emergency support.

Vendors

Customers

Pros

Very high-quality revenue: consistent, sticky, and high-margin

The customer has support for emergencies

Can develop automations for improved margins

Benefit from lower costs from scale of vendor

Creates opportunities cross-selling

Increases company valuation more than other forms of revenue


Cons

Need a minimum scale to be cost efficient

Cost is usually more than equivalent hours worked

Estimating costs can be difficult without real-world data, especially for your first few deals


Retainer

Retainer pricing is an agreement where clients pay a recurring fee, typically monthly, for a minimum number of hours. This model guarantees availability and priority service over non-retainer clients. It's best suited for clients who need consistent work but not enough to justify a full-time position. For service providers, retainers mean predictable income and deeper client relationships.

Vendors

Customers

Pros

Consistent revenue that increases customer consistency

The customer has access for emergencies

Create opportunities for cross-selling

Easier to implement than a subscription

Cons

Can be disruptive to the team until a minimum scale is reached

Use it or lose it setup continuously makes the customer question value


Performance-Based Pricing

Performance-based pricing ties the provider's compensation to the value delivered, such as cost savings or revenue growth. It's a high-stakes model that rewards successful outcomes and is more common in sales than tech services. Venture studios use performance-based pricing for tech services. In addition, some tech services companies offer it for savings cost savings. This model is rare for tech services, but the key to implementing this model is to provide proof of value delivered or good data practices. This is a great practice to maintain.

Vendors

Customers

Pros

Highest margin with likely >10% value capture

Minimum risk to customer

The implementation itself is the proof of competence

The highest chance of success because of complete alignment of goals

Get data infrastructure to conduct better experiments.

Cons

Compensation includes factors outside the control of vendor

Higher overall cost than if you can develop the expertise in-house

Need to develop data practices to showcase outcomes


Pricing Model And Tech Services Strategy

Choosing the right pricing model is critical to the health of your tech services business. By considering the pros and cons for both your company and your customers. Two things to keep in mind:

  1. You can mix and match models.

  2. You can capture some of the goodness of other models by following their best practices despite what the contract says.

Your pricing model critically impacts both the sales and delivery of your services. Subscribe to our blog or follow us on LinkedIn to ensure you don't miss out as we explore this connection further.

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