Which billing model should you choose for ecommerce implementation?
Consider whether the Time&Materials or Fixed Fee model will be the best solution for your project.
Which billing model should you choose for ecommerce implementation?
Billing models with a Software House
What is a Fixed Fee (Flat Rate)?
What is Time and Materials (per work hour)?
Advantages and disadvantages of Time&Materials and Fixed Fee models
Advantages of the Fixed Fee Model
Disadvantages of the Fixed Fee Model
Advantages of the Time & Materials Model
Disadvantages of the Time&Materials Model
What model to choose for ecommerce implementation?
Summary
If you plan a small e-commerce implementation with a budget of around 6.000 EUR/USD, you should choose the Fixed Fee model. However, for medium and large ecommerce implementations, such as Presta, Sylius, or Magento, I recommend a Time and Materials billing.
To understand why I recommend these billing models, we must first define Time&Materials and Fixed Fee.
These terms often come up during discussions between ecommerce agencies and potential clients. Not everyone may be familiar with industry jargon, so it’s worth explaining what Time&Materials billing and the Fixed Fee model are.
The first point is billing under the Fixed Fee model. This model is based on the ecommerce agency defining the scope of implementation and providing a single amount for the implementation.
For example, the agency precisely describes the functionality and appearance of your online store. Then, it internally estimates the estimated labor intensity of creating the store and gives you a figure.
It could be, for example, 33.600 EUR/USD for the implementation of an online store. The amount you agree upon is precisely that amount – for 33.600 EUR/USD, you get an online store that meets the agreed specification.
This is very simple and understandable. Like buying a car, you pay a certain amount and receive a car with a specification that you have chosen (provided the salesperson didn’t mess up the order). This is one of the billing models you can use when working with an ecommerce agency.
However, a second billing model is also known as Time and Materials. Employees of an ecommerce agency will have to spend a certain amount of time developing your online store.
The project coordinator managing your project will allocate time for management, and developers will spend time coding your store.
The final budget for implementing the online store is the multiplication of the number of hours the agency’s employees will work on your project and the hourly rate agreed upon with the software house.
Consider the situation where a specific Software House estimates before implementing an ecommerce store that its realization will take between 800 and 1200 hours. Ultimately, this process consumes, for example, 1100 hours, and the cost of the online store results from multiplying these hours by the hourly rate. The hourly rate is 70 EUR/USD. The final project budget would be 1100×70 EUR/USD = 77.000 EUR/USD.
This model differs because you are not entirely certain how much you will pay for the implementation of your online store.
Now, let’s analyze the pros and cons of these types of billing.
I don’t want to present this from the perspective of an ecommerce agency, as each will assure you that the Time and Materials model is the absolute best solution with no downsides.
I believe this topic is debatable, and the choice is not obvious. Presenting the pros and cons of a given solution will let you know what will work best in your case.
Let’s start with the advantages and disadvantages of the Fixed Fee model, which is a flat rate for the implementation of a given online store.
The most important advantage is security or, rather, financial predictability. For instance, if you are an ecommerce director at a large corporation and want to implement a B2B ecommerce, the CFO and the board will expect a specific amount to be budgeted.
Finances are not planned in an imprecise manner, so the Fixed Fee model provides this financial predictability. If you have a well-defined scope for implementation, you know exactly how much you will pay for it.
This is a huge plus of this billing model, but essentially the only one.
As a client, however, you should be aware of the downsides of this solution.
The first disadvantage is the small number of companies that offer the Fixed Fee model for medium and large ecommerce implementations. We are not talking about SaaS here but about medium and large implementations. Moreover, few agencies even implement Shopify, a SaaS, on a Fixed Fee basis. What does this mean for you?
Right from the start, you should ask the agency if they work in the Fixed Fee model. You’ll likely find that nobody proposes this model out of the 12 agencies offering Magento that you’ve chosen to contact. When choosing Fixed Fee for medium to large implementations, you have to choose from a significantly smaller pool of ecommerce agencies.
Another point is that you don’t benefit from the fact that the development of programming tasks takes less time than originally estimated.
If the agency initially estimated the development of a page to take between 18 to 30 hours, but in reality, it only took 10 hours, you do not benefit from this. Agencies offering a fixed estimate assumed they could code the online store in 30 hours. If they managed to do it in 10, you would not benefit from the work being done faster and more straightforward and coding taking less time. The ecommerce agency is the only one benefiting from this.
The Fixed Fee model requires perfect business analysis. Business analysis (also called the discovery phase) should describe the final effect you wish to achieve as precisely as possible.
If something is not described in the business analysis, you will likely assume it will be done. However, if the ecommerce agency has not described it, they will not implement it and will not include this element in the Fixed Fee estimation.
Suppose that mockups have been prepared, and we have a registration page. The registration page should have validation. Unfortunately, it was omitted in the technical documentation prepared at the very beginning.
It was not described or found in the mockups, and you did not check if it exists. It’s obvious that validation on the form should be implemented.
However, if you notice that in the online store, for which you paid 84.000 EUR/USD, there is no validation, the ecommerce agency will refer to the documentation. They will say that there is no mention of validation, so it was not estimated and not implemented.
This is how practically every discussion ends, and the ecommerce agency will ultimately inform you that they can implement it, but there will be an additional charge. If you are interested in implementing validation, they are willing to prepare an appropriate estimate for this additional task. At this point, the predictability of the project budget is crushed. You seemed to know exactly what you would pay, but additional costs still appear.
The question is: at the discovery phase of a very complex project, can you describe every minor feature? It can be done more or less precisely, but it can’t be done perfectly.
Even we (sounding immodest), carrying out the discovery phase very carefully, are not able to perfectly record 100% of the implementation scope. There will always be a minor element that is not described, but ultimately, it must be implemented because it is an important online store feature.
In such a case, a perfect discovery phase is required, and the more complicated the project, the harder it is to do. With large implementations, it is impossible to perform a pre-implementation analysis that would perfectly (100%) describe the scope of implementation.
Another drawback is costly project administration. Each change in the ecommerce project scope requires the sign of an annex, which generates additional administration.
For medium to large implementations, the number of such annexes can reach dozens within, for example, an eight-month project. Preparing, signing, and negotiating annexes is a costly process. In the Fixed Fee model, the ecommerce agency includes these costs in the estimate, making the project budget high.
Another disadvantage related to this process is discussions with lawyers. If no agreement is reached, each discussion will come down to determining what is described in the project scope.
In the Fixed Fee model, the ecommerce agency assesses the time it will take to implement, knows its employee costs, and estimates how much it would like to earn from it.
This results in the final amount. Ecommerce agencies with experience in many projects realize that there is a possibility of exceeding these estimates. To ensure safety and guarantee profit from the project, agencies often add margin to the initial estimate.
As a result, we get a much higher final estimate. Usually, if an estimate is done in the Fixed Fee model, it is an average of 60% to 80% higher than in the Time and Materials model.
This happens because the agency wants to secure its risk. In the event of possible overruns, the agency must cover these costs, which is why it adds the cost of risk to the estimation.
Unfortunately, this cannot be avoided, as the elimination of financial risk on your side has its price (expressed in EUR/USD).
The Time&Materials model is a solution that most agencies implementing medium and large ecommerce platforms propose. Its pros and cons are precisely the opposite of the Fixed Fee model.
Advantages include a large selection of firms because most work in the Time&Materials model.
Another advantage is the minimal amount of administration, which means no additional costs are associated.
Plus, if the work takes less time, you gain from this, as you are billed for the hours worked, not a flat fee.
For example, if something was planned for 20 hours but takes 10, you will pay for 10. That’s your benefit.
The Time&Materials model has one significant drawback, which can be problematic for many people and ultimately impossible.
The agency may estimate that the work will take anywhere from 800 to 1100 hours. As a client, you might ask, “Do you guarantee that you will not exceed 1100 hours of work?”
Wanting to be honest, the agency will respond: “We cannot give such a guarantee.” This is the biggest and most challenging issue of the Time&Materials model because you pay for worked hours.
If it turns out that the project did not require 800 to 1100 hours but 1600, and there are still additional tasks to be done, you have a problem since you probably provided too small a budget, and now the CFO has certain comments for you.
I would like to simplify this matter. There are ways to increase the predictability of the time required for an online store implementation with a Time&Materials model, even if it is a medium or large implementation. I plan to describe this in my next article, which will be published in a week. I will present methods that will help minimize this enormous disadvantage of the Time&Materials model.
To be entirely honest, we must state that Time & Materials does not provide 100% financial predictability. It is essential to remember this. This model has many other advantages, but the final choice is yours.
The Fixed Fee model will be more expensive, both financially and administratively. It requires more involvement in administrative and legal discussions, annexing, and changing scopes.
Ultimately, choosing a model will probably come down to finding a recommended agency that agrees to work on a Fixed Fee model for a medium or large ecommerce implementation. If that is not an option, even if you want to pay more for less risk (thus for the Fixed Fee model), it won’t help much due to lack of supply.
However, if you find a good ecommerce agency willing to execute a complex B2B and B2C project for a set amount and prepare a perfect business analysis in which every element is described, I would choose it.
The reality is that even a very detailed business analysis will not cover all the minor processes that, during project implementation, will prove necessary to implement in the online store.
In such a case, annexing the contract will be necessary, and so the financial predictability of the Fixed Fee model evaporates.
There is no denying it – the Fixed Fee model offers greater predictability and financial security, but it comes with a higher cost. Therefore, it is necessary to consider whether we are willing to pay a significant premium for this financial predictability, or whether it is better to choose the Time and Materials billing model and simultaneously take measures that will reduce unpredictability.
If we plan a small ecommerce implementation, that is, one up to 6.000 EUR/USD, regardless of whether it is SaaS or open source, we have many firms at our disposal that can complete the project on a Fixed Fee basis. Such implementation is usually less complicated and does not require advanced integrations, so it is easier to determine its scope. In that case, I recommend the Fixed Fee model, which will ensure financial security.
Suppose you plan a medium or large online store implementation, whether open source or SaaS, and the implementation cost exceeds 28.000 EUR/USD or 42.000 EUR/USD. In that case, I recommend the Time and Materials model. I am not inclined to take a high risk, but I would also not want to pay a high price for the absence of risk. I would, therefore opt for a Time&Materials billing with a few additional agreements with the agency, which I will write about in a week.
Are you curious about the topic of ecommerce billing and find the knowledge contained in this article valuable? If so, be sure to check out the post talking about how to make Time&Materials billing more financially secure!
