Technology Services Engagement Models and Pricing Strategies

Technology services and consulting firms collaborate with customers through various engagement models. While there isn’t a one-size-fits-all approach, the key to successful sales and account management is positively impacting the customer’s business while ensuring healthy revenue streams and gross margins for the service provider.

Below, we outline some standard engagement models and pricing strategies. While not exhaustive, this list is a solid foundation for exploring alternative ways to structure customer relationships and project pricing. These models are ranked from highest to lowest potential risk/reward for the service provider:

• Joint Ventures (JVs): Joint ventures involve the customer and service provider partnering to enter a new market or developing a new product, sharing both risks and rewards. In this model, the service provider may earn some of the revenue or profits the venture generates, but there is no guaranteed income unless the initiative succeeds.
• Outcome-Based Pricing: This model ties payment to specific project outcomes, often starting as a Fixed Price or Time-and-Materials (T&M) engagement with added incentives or penalties. For instance, a $1,000,000 fixed-price project could include a 10% bonus for early completion (e.g., within six months instead of nine). Alternatively, T&M rates might decrease if predefined performance metrics like user engagement aren’t met.
• Fixed-Price / Fixed-Fee: In this traditional model, the service provider commits to delivering a defined project scope for a set price. For example, developing a mobile app for logistics drivers might come with a fixed fee, provided the scope remains unchanged. If the scope evolves (scope creep), change orders typically come into play to adjust pricing.
• Fixed Price per Story Point: This model is tailored for agile development. The customer pays a set price per story point, offering visibility into features delivered while allowing flexibility to scale teams based on development velocity. Pricing story points appropriately is crucial to achieving target gross margins while managing revenue volatility.
• Fixed Price per Sprint: For projects structured around agile sprints, this model offers the customer cost visibility tied to the team’s efforts. A fixed price per sprint accounts for team size and capacity, aligning with the number of story points the team can deliver. This approach ensures both parties maintain transparency on deliverables and costs.
• T&M Project Work: In this classic time-and-materials model, the service provider owns the project outcomes and assembles a team to meet the customer’s goals. This model typically includes multiple roles to deliver a comprehensive product or achieve desired business impacts.
• T&M Staff Augmentation: The service provider supplies additional team members to support the customer’s project without assuming full ownership of outcomes. Customers often interview and approve staff, who are billed based on time (hourly, daily, monthly, etc.). This model accelerates customer objectives while maintaining flexibility.
• Managed Services: Commonly associated with ongoing support or maintenance projects, Managed Services involve a set number of hours purchased by the customer. Unused hours may expire, and pricing is typically a monthly fee.

Elaxtra Advisors is an M&A and value-creation advisory firm that assists institutional investors, private equity-owned platforms, and strategic acquirers invest and create value in worldwide technology services companies. Please contact us to explore potential partnerships.