When businesses outsourced years ago, they did so because it was cost-effective and fast. As it became a strategy that gave you a competitive edge, it’s now about making smarter choices with the money you’re already spending.
If you’ve ever stared at a contract from a service provider and thought, ‘What exactly am I paying for?’, you’re not alone. The pricing model behind your outsourcing deal shapes everything from your budget to how much influence you have over the work being done.
Most business leaders don’t fail at outsourcing because they picked the wrong vendor. They failed because they didn’t understand the terms of the deal.
A Deloitte survey shared that 70% of organisationssaid saving money was their main reason for outsourcing. But cost savings depend on how the work gets priced. And with about a dozen different pricing models in use, it’s no wonder the whole thing feels confusing.
This guide breaks down the 12 common outsourcing pricing models. We’ll explore what each one offers, who or what it works best for, and how to avoid paying for things you don’t actually need.
Table of Contents
- What are Outsourcing Pricing Models?
- Why It’s Important to Understand the Pricing Models When You Outsource
- 12 Common Types of BPO Pricing Models
- Staffing Model
- Dedicated Team Model
- Time and Materials (T&M) or Cost and Materials (C&M) Pricing Model
- Fixed Price (FP) Model
- Cost-Plus or Cost Reimbursable Model
- Value-based Pricing Model
- Retainer-based Pricing Model
- Share Risk-Reward Pricing Model
- Performance-based Pricing Model
- Consumption-based Pricing Model
- Profit-sharing Pricing Model
- Incentive-based Pricing Model
- Which Outsourcing Pricing Model Suits Your Business Best?
- Unlock Savings by Understanding Outsourcing Pricing Models
- FAQs
What are Outsourcing Pricing Models?
Outsourcing pricing modelsare the financial frameworks businesses use to pay service providers. These models determine what you’re charged for, whether it’s hours worked, results achieved, or resources used.
Some offer flexibility, while others give more predictability. The choice depends on your goals, the nature of the work, and the types of outsourcing risksyou’re willing to take.
Choosing the wrong pricing model can lead to scope creep, surprise invoices, or underwhelming outcomes. That’s why understanding these models is essential.
Why It’s Important to Understand the Pricing Models When You Outsource
You wouldn’t buy a house without understanding the mortgage terms, right? Outsourcing is no different. The pricing model dictates everything from deliverables to timelines to accountability. Get it wrong, and you could pay for work that doesn’t meet your needs.
Understanding pricing models for outsourcing helps you:
- Forecast budgets accurately
- Avoid hidden fees
- Set clear performance expectations
- Foster better collaboration
- Minimise financial risk
12 Common Types of BPO Pricing Models
Here are 12 of the most common business process outsourcing (BPO) pricing structures you’ll encounter:
1. Staffing Model
The staffing model is simple: You pay for a person’s time. The staffing model is like hiring remote staffwithout putting them on your payroll.
You manage their tasks, and the outsourcing provider handles HR, compliance, and payroll logistics. This structure also often works on an hourly or monthly rate per staff member.
It works well when you have clear instructions and need full-time support. You also get control without the legal and administrative burden of employment. But if your needs shift a lot, this model can be a bit rigid.
Best for:Projects with flexible scopes, clearly defined skill requirements, and a need for direct client control over individual resources
2. Dedicated Team Model
With a dedicated team model, you’re essentially renting a department. The team works only for your business, but they remain employees of the service provider. This model suits long-term projects or ongoing work like development, design, or support.
This arrangement lets you build rapport and consistency with the team, and they learn the ins and outs of your business. Pricing is usually monthly and based on team size and expertise. It costs more upfront but pays off in continuity.
Best for:Long-term projects with evolving requirements, where team consistency and integration are crucial, and cost predictability is desired
3. Time and Materials (T&M) or Cost and Materials (C&M) Pricing Model
This model bills you for actual hours worked and materials used. It’s transparent and flexible, making it a go-to for evolving projects where the scope isn’t locked down.
However, that flexibility can backfire if you don’t keep track of hours or scope.
Agencies love this model because they get paid for the real work done. But clients should watch for scope creepand runaway costs.
Best for:Projects with unclear or evolving scopes, where flexibility is needed, and the client is comfortable with variable costs based on effort
4. Fixed Price (FP) Model
Fixed price means the work has a set cost, no matter how long it takes to complete. This model works great for clearly defined projects with specific deliverables. You get predictability and lower risk, especially if you hate unexpected invoices.
But the downside? Service providers may cut corners to protect their margins. It’s ideal for small, short-term projects where you can define everything upfront. If your project scope changes midstream, things get messy fast.
Best for:Projects with well-defined scopes and deliverables, where cost predictability is a primary concern
5. Cost-Plus or Cost Reimbursable Model
Under this model, you pay for the actual cost of work, plus a fixed percentage markup for profit. It ensures transparency since you see where every dollar goes.
This pricing arrangement is often used in government or construction contracts, but some service providers use it for outsourcing too.
It gives vendors less incentive to cut corners since they’re not squeezed on price. But it does shift financial risk to the client. Be prepared for higher oversight and regular audits.
Best for:Projects with uncertain or highly complex scopes, where transparency in costs is valued, and the client is willing to manage variable expenses
6. Value-based Pricing Model
This one ties the price to the value delivered, not the hours spent. For example, if outsourcing marketingleads to $100K in new business, you might pay a set percentage of that revenue.
It aligns your vendor’s success with your outcomes, which encourages quality over quantity. But it’s tricky to define ‘value’ and even harder to measure it.
Great for partnerships built on trust, not spreadsheets. If you like shared success and have good metrics, this can be a smart play.
Best for:Engagements where the value delivered by the outsourcing provider can be clearly defined and measured, and where aligning incentives with business outcomes is a priority
7. Retainer-based Pricing Model
This arrangement makes you pay a set fee each month for access to ongoing support or services. It’s predictable, simple, and works well for ongoing needs like design, content creation, or IT support.
The provider knows what to expect financially, and you get consistent access to help. This model builds long-term relationships and steady results.
It’s not great if your needs change wildly from month to month. But if you want reliability, it’s a solid option.
Best for:Ongoing support, maintenance, or regular tasks where a predictable cost for a guaranteed level of service is desired
8. Share Risk-Reward Pricing Model
Here, both the client and the provider share the risks and rewards of a project. For example, if the project exceeds performance goals, both parties benefit financially. If it falls short, both take a hit.
It aligns incentives and creates a sense of partnership, not just a transaction. But it needs strong trust and a clear framework to work well. It’s not for everyone, but it can turn vendors into true collaborators.
Best for:Projects with clearly defined success metrics and ambitious goals, where aligning the incentives of both parties is beneficial
9. Performance-based Pricing Model
You pay based on specific outcomes, like leads generated, uptime maintained, or tickets resolved within a service level agreement (SLA). This model keeps everyone focused on results.
It’s great when outcomes are measurable and important to your bottom line. But it can backfire if metrics are vague or unrealistic. It pushes providers to perform, but it needs clear contracts. You should both have a shared vision of what a successful result is.
Best for:Engagements where specific, measurable performance outcomes are the primary focus, and payment is directly tied to achieving those results
10. Consumption-based Pricing Model
Also known as pay-as-you-go, this model charges based on usage. Think cloud storage, API calls, or customer service tickets. It’s scalable and fair, as you pay only for what you use. But budgeting can be tricky if usage spikes.
This model is ideal for businesses with fluctuating workloads. Make sure there are no hidden minimums or fees.
Best for:Services where usage can be easily measured and fluctuates, offering scalability and cost-effectiveness based on actual consumption
11. Profit-sharing Pricing Model
Here, the vendor takes on some business functions and shares in the profits they help generate. It’s a high-trust, high-stakes arrangement that aligns long-term interests. You both succeed together, but you also risk together.
Not every vendor will agree to this, and it requires detailed contracts. It can work beautifully in joint ventures or startups. But it’s complex and best for mature relationships.
Best for:Outsourcing engagements that directly contribute to revenue generation, where aligning financial interests with profitability is key
12. Incentive-based Pricing Model
This model adds bonuses for exceeding performance benchmarks. It can be layered onto other pricing models.
For instance, a call centre might get bonuses for high customer satisfaction scores. It motivates teams to go the extra mile. But make sure incentives are realistic and measurable.
Used well, this outsourcing pricing structure improves quality without micromanagement.
Best for:Situations where motivating the provider to achieve specific performance goals or milestones is desired, often used to enhance other pricing models
Which Outsourcing Pricing Model Suits Your Business Best?
The right outsourcing pricing model depends on your project, your budget, and your appetite for risk. If you’re running a one-off project with clear goals, fixed pricing might be perfect.
For long-term work, dedicated teams or retainer models make more sense. If you’re focused on performance and results, value-based or performance pricing can align incentives well.
Talk with potential vendors about what makes sense for both sides. Transparency leads to better partnerships. And flexible models often lead to more trust.
Unlock Savings by Understanding Outsourcing Pricing Models
Most businesses leave money on the table simply because they don’t know their options. When you understand how pricing works, you negotiate better, you plan better, and you get better results. And that’s absolutely true when you outsource.
If your current outsourcing setupfeels expensive or underwhelming, the issue might not be the vendor. It might be the pricing model. Dig into it, ask questions, and explore alternatives. You might be surprised at how much control you can get back.
FAQs
What is the most common outsourcing pricing model?
The T&M model is one of the most widely used, especially in IT and software development, because it offers flexibility and adapts well to evolving project needs.
What is the most cost-effective outsourcing pricing model?
The most cost-effective model depends on your needs. Fixed-price models work well for defined projects. Staffing and dedicated team models are efficient for long-term roles. Consumption-based pricing is great for fluctuating workloads.
Can I switch pricing models mid-contract?
In some cases, yes. But it depends on your agreement and the vendor. Always include flexibility clauses in your contract if you think your needs might evolve.