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What is the Business Model of a Contract Research Organization?

Taking a drug through the regulatory pathway can be challenging, time-consuming, and very costly. Owing to that, biotech and pharmacy companies prefer to outsource that work to contract research organizations. Note that a contract research organization, most often referred to as a clinical research organization or CRO, is a company that helps conduct research for a sponsor company. This research can include anything from pre-clinical development of new products to post-marketing research activities.

According to reports, CROs have been around for decades — they first appeared in the 1940s and 1950s with the likes of Huntingdon Life Sciences and Charles River Laboratories. Although CROs are the outsourcing partner for the life sciences sector, some other industries are gradually beginning to leverage this concept.

For instance, Tech companies have started outsourcing certain key proponents of their business. Some time ago, Skype made use of outsourcing services to establish the back-end development of its app, and Google still very much works with companies like Cognizant.

Note that the primary reason why a sponsor company utilizes the services of a contract research organization is that contract research organizations are experts in conducting research. Contract research organizations help pharmaceutical or biotechnology companies by helping them save costs and also lessen the time needed to conduct clinical trials.

Businesses may also outsource clinical trials once they feel they lack the complete know-how of regulatory affairs in a specific area of interest or if regulations mandate them to have a legal presence in that country before carrying out clinical trials.

Don’t forget that a contract research organization (CRO) can work with several sponsors. As experts, CROs are a valuable resource for pharmaceutical companies. They are fast to adopt the latest technologies, allowing them to offer unique insights and advice, spotting novel and exemplary ways of utilizing these advanced tools, and adapting them to each sponsor’s needs to ensure optimal clinical trial performance.

4 Business Models for Contract Research Organizations

Contract research organizations are mostly B2B establishments and everyone benefits from their efforts. While a good number of them stick to the variable pricing model, some adjustments are becoming prevalent in the industry. Here are a few business models being adopted by industry players in recent times.

1. Fixed Price Models

This business model, according to experts, remains very advantageous to projects with a detailed scope and a pronounced set of requirements. This sort of business model tends to put all of the risks associated with the project on the CRO because the sponsor won’t pay until the work is completed. Note that this model is more suitable for long-term projects with a high value to the sponsor because it makes the CRO complete the work efficiently.

  1. Time and Materials (T&M)

One of the most popular business models in the world, the T&M requires contract research companies to bid for the project based on the sponsor’s requirements, depth of scope, and the amount of work that will be completed. Have it in mind that this model works really well if the teams involved are experts at noting the project needs. That way, the CRO will invest less time reworking problems, shortening the project completion time and saving the sponsor money.

  1. Incentive-Based Pricing Models

Well renowned as an add-on to the more traditional models noted above, incentive-based models feature bonus payments to the CRO as a reward for meeting performance goals above and beyond what’s noted in the contract agreement. Have it in mind that these incentives can make up for shortcomings in fixed-price or T&M models ensuring your CRO’s motivations stay in line with the sponsor’s own.

  1. Shared Risk-Reward Pricing Model

Note that this business and pricing model comes with enough flexibility that it is becoming hard to ignore amongst CROs. Like the Incentive-based model, this model features a flat rate and holds extra payments until the CRO achieves specific objectives. However, in this model, both the contract research company and the sponsor usually share funding for the development of new products, allowing the CRO to also share in the rewards for a specified period.

How Do Contract Research Organizations Make Money?

Note that the ways CROs make money vary based on their business model, type of client, job description, and contract signed. However, they generate revenue from each paying client. The needs of one customer will surely be different from another customer.

The revenue CROs generate also tends to be defined by their short and long-term goals, the size of the company, and their budget. However, the advantage CROs have is that they are directly benefiting regardless of the model or contract.

They are also directly benefiting from that long lead time. They also basically make money on a product regardless of what the outcome is. If a product fails to live up to its expectations, the CRO still gets paid for carrying out a trial.

In addition, if, for instance, a drug enters phase 1 clinical trial, by the time it gets through phase 3, that process can take many years. A CRO that started from phase 1 will likely have to see it through to phase 3. If a CRO lands a good deal early in its life cycle, they get a lot of revenue visibility as the drug develops, and that can be quite attractive.


Contract research organizations are known to partner with biotech and pharmacy companies, and they handle every aspect of the clinical trial process. Note that they can design the trial, get in contact with clinics to carry out the trial, run the tests, analyze the data, and aid with the regulatory submission.

Have it in mind that if a company intends to outsource that work, or even just partner to get consulting advice, CROs are a natural go-to partner for them. However, clearly understanding their expectations and choosing the right pricing model can go a long way to achieving success.