The Fixed-Price Trap in Developing an MVP for Our Technology Product

We Israelis really like to know in advance how much something will cost us 🙂 And there is logic to that because, in the end, no one has a bottomless wallet. (Except for Elon Musk). I decided to write a post on a topic that I have been encountering for many years and have invested a lot of resources in explaining to customers: Most technological startups will fail due to the fixed-price trap.

From my 7 years of experience in the field of development and recruitment, I have drawn many conclusions on the subject that I would like to share, and perhaps they will help you.

So, what exactly is a fixed price?

Fixed price is a static pricing method for the entire scope of work, as understood by the service provider. In the B2C world or sales of ready-made products/services, it is the accepted pricing method in 99% of cases.

For example:

I sell bread > and the customer comes and asks for the price > I say 5 shekels > the customer pays, and I deliver the product.

Everyone got the value they expected.

Now let's go back to startups. How does the process of launching a technology startup usually begin from the moment of the idea?

We have an excellent idea that we believe is the "billion-dollar idea."

Most people first think about the final product and translate this fantasy into something tangible. Most of us start from this point, as we (the entrepreneurs) fall in love with our product at first sight, and the thing we want most is to translate it into something tangible.

After we have sketched the idea on paper/document/Photoshop, the next step is to try to substantiate our feeling with numbers - the research stage: This means we try to reinforce our enthusiasm with theoretical numbers and prove to ourselves that it will work. We check market size, potential, partnership costs, etc.

Usually, everything is rosy and beautiful at this stage:

• We have no financial obligations
• We have no expenses
• We have not yet invested thousands of hours
• We have not yet stepped on all the pitfalls

At this stage, the entrepreneur is at the peak of excitement, full of motivation to go out into the world, and is 100% convinced that they know for sure what their "customer" needs, that they are solving a crazy problem and that they know how to translate it into a product.

I'm sorry to disappoint you at this point. 99% of the time, this is not true. Chances are the product you are fantasizing about is not really the product that your "ideal customer" needs and does not really address the pain you think it will solve.

Here begins the fixed-price trap:

Most of the projects that approach us at various stages of the project start with a "cost check" (after they have gone through all the other stages of research, obtaining self-funding, fundraising, etc.). Entrepreneur knows 100% what their customer wants, so why not get a fixed-price quote for it?

The entrepreneur begins to send their specification (in the best case) or just a salad of words on a page that is supposed to translate their product into text.

Once the suppliers receive the initial information, they understand the product as they understand it and translate it into a price quote.

A price quote for a complex technological product mainly consists of working hours for employees who will work on the project (programmers, QA people, project managers, etc.)

For each software or service provider, there is an hourly rate ranging from 100-1000 shekels per hour, the average probably ranges around 300-400 shekels for quality providers or 100-200 for freelancers (depending on technologies).

The price received by the entrepreneur is derived from the hours the supplier thinks they should invest in the project multiplied by the hourly rate plus a 20-200 percent risk factor (with an average of 50%).

This means that if you received a 1000 shekel offer and a 100,000 shekel offer in the same country with companies of the same level, chances are each one understood the scope of work differently.

So where is the problem and why fixed-price for technology startups is a bad pricing method:

Your idea does not match the market need between 1% and 100% (1% if you are really, really experts and super-smart in the field)

Entering a long development adventure of months without the ability to adapt it to the real need and without flexibility is shooting yourself in the foot.

You are buying a cat in a bag, and you don't really know how to choose the best offer and don't really know what the output you will receive is.

There are many subjective elements such as design, for example, and many technical elements such as code documentation and building scalable code, differences between technologies, use of existing products, etc.

Fixed price is a psychological barrier:

Execution speed is a very important factor in a constantly changing technology world that operates 24/7 at the speed of light, most entrepreneurs fail to find the balance between the minimal viable product that can actually be launched in the market and their fantasy of doing everything.

Here it is anyway, it's costing me a lot of money, and I want to get everything.

Here, without paying much attention, many entrepreneurs screw themselves over, and I've seen many, many like this.

Fixed price is taking a one-sided risk; the supplier takes 100% of the risk and the responsibility that falls on the entrepreneur is low, so as greedy people, we simply cannot let go; we want more and more and more for it to be perfect.

In the end, our product ceases to be unique because another 100 new entrepreneurs have developed a similar product and managed to break through in the meantime.

There will always be a gap in understanding between the supplier and the entrepreneur.

The supplier will phrase your specification differently from what you think it should be phrased, and this is true in 99% of cases, even if there is a crazy specification with illustrations, etc.

Lack of flexibility, for example, today you understood that one of the things you thought would be cool > won't work, and it's not the main feature that will bring all the money, but you did understand that there is something your customer needs.

With a fixed price, you won't be able to change your mind because it will cost you a lot of money and many arguments with the frustrated supplier who wants to finish and get the money.

Lack of budget control, fixed-price is supposed to give you budget control but the opposite is true, usually, entrepreneurs put too little risk in their budget.

We raise a budget based on the proposal we chose (maybe doubled), but the gap between the entrepreneur's understanding of the product and the supplier's understanding and the gap between the customer's real needs leaves entrepreneurs without a product and without money very quickly.

Well, if you've read this far, I'm done with all the darkness and fear, and I'm moving on to my tips!

Meet the "Time & Materials" pricing method:

What are Time & Materials, in essence?

In simple terms, it's a pricing method based on actual working hours.

This means that the project's pricing will be given not in a monetary format but in an hourly modular format.

Example: Part A - Model A will take 10-20 hours, once done, we move on.

My tips on this topic and how to work with this method without having an endless pocket?

Start backward, start by setting a budget, and ask the professional to give you a budget-compliant plan in an hourly modular format.

The 'guess how much money I have and whoever offers the cheapest will be chosen' game is a method that simply doesn't work (I wrote about this in the disadvantages of fixed-price)

First, understand that there isn't too big a gap between the desirable and the actual.

Try as fast as possible, almost all entrepreneurs who come to us for an MVP come with a specification for a finished product that is far from the real minimum product they can launch.

Most entrepreneurs have paranoia about a bad first impression or getting burnt in the market.

But that's not the case!

There are 9 billion people in the world, and if your product targets a large enough market, there are countless potential customers.

Even if you burn your first impression with 1000 potential customers, there are still millions more, and those 1000 will come back to you when your product is really good.

And if you are still afraid? Then fine, set up your product under a different brand, create a "fictitious brand" and run a campaign to get real data from the field.

Intermediate tip:

Don't forget to embed traffic analysis tools (like Mouseflow, Hotjar, etc.) as they sometimes provide much better feedback than human feedback because users don't always know what they really want.

Your project specification is an authority compass, not a law from Mount Sinai (I'm sure many skeptics in the field will scream at me for saying this).

A project is not an existing working company building a product for itself, a project is a theory, a belief that "our fantasy will work."

Therefore, insisting on the full execution of the specification is nothing less than foolish; I suggest doing everything in a modular way.

Listen to your potential customers, draw conclusions, and adapt the product to their needs.

Collecting feedback on what you've already launched and drawing conclusions is much more important than executing the entire product according to the book.

Startups require flexibility! And pivoting is part of the game.

Stop being perfectionists if you're not Elon Musk and don't have $100 million for tests on a new fantasy, just forget about it.

The product will never be perfect; I love pink, someone loves blue, etc.

In the end, it's your buyer who decides, not you.

The business strategy goes hand in hand with the stages of your project:

Using the Time & Materials method, you can build the project in stages, with each stage meant to bring a step in the strategy, for example:

Launch a minimal viable product (MVP) > Strategy to bring in the first 100 users and get feedback.

Product B > Start marketing.

Product C, D, E... Monetization, etc.

If you have a technical partner on the team, consider hiring an employee instead of using Time & Materials, as you can save about 70% of the project costs, assuming you have the skills to manage the process alone.

There are many more points, but this is the foundation; I hope you got some useful tips 😉

Do you want to reach your MVP too?

Let's schedule a free consultation on setting up a technical team for your startup:

slava@uanvi.com

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