App Development Series: Different Business Models

“I’ll gladly pay you Tuesday for a hamburger today.” – J. Wellington Wimpy

Communication, as this series has discussed, is a cornerstone of the partnership between you and your developer. It’s essential when your developer’s building the app, but it’s equally essential for discussing their pay rate.

There are a few different business models that you can use to decide how you’ll do business with your developer. Generally, you choose one model and stick to it. For this post, I’ll give a rundown of the three models app developers most commonly use.

  1. Hourly rate

You and your developer agree to an hourly rate, and they record the hours they work. This model works out better if you’re partnered with seasoned developers, who can get more work done within shorter time frames. Developers work at different paces, and you might not realize that initially. Even if the developer doesn’t accomplish everything you wanted them to do this week, they’ll bill you for the hours that they worked.

  1. Fixed price bids

This model is the best choice when you and your developer agree on a fairly precise specification. You know exactly how much you’re going to pay, and they know exactly what they’re supposed to build. However, if you’re not clear in your specifications, then there’s a pretty good chance that the developer will build something that you might not like. That’s when things really get “interesting.”

  1. Hybrid rate

You and your developer agree to an hourly rate. For every sprint, your developer assigns a number of hours to the sprint, and tells you that the number of hours you work for this sprint can’t exceed the sprint’s allotted time amount. For each sprint, you can earn a maximum amount equal to the hourly rate times the sprint’s total work hours. In my opinion, this model is the best one to use if you’re not sure about some features of your app. It also allows you to manage your budget more effectively.

Once you and your developer choose a business model, you then need to agree on the method of payment. This is relatively easy. There are three commonly-used methods through which developers get paid.

  • The most straightforward way is via direct invoice, where you pay them via check, PayPal, or just transfer it to their bank account.
  • Alternatively, the developer can choose to receive a smaller payment and a percent of the app’s future proceedings, instead of getting the full payment all at once.
  • Finally, an option is they can choose to receive a smaller payment and ownership of a part of your company, and benefit from other product sales from your company.

You and your developer need to exercise caution choosing the right business model/payment method combination. Don’t assume your developer agrees to any arrangement until you get their written confirmation. Payment and finances are tricky to negotiate, but if you put thought and effort into your considerations, you and your developer will both reap the benefits of your app.

Next time: Maintenance and Support

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