Pricing Strategies for Information Technology Services: A Value-Based Approach Robert Harmon Portland State University harmonr@pdx.edu Haluk Demirkan Arizona State University haluk.demirkan@asu.edu Bill Hefley Carnegie Mellon University hefley@cmu.edu Nora Auseklis Intel Corporation nora.auseklis@intel.com Abstract While commoditization is creating opportunities for customers of information technology services, it is creating new challenges for the service providers. Pricing strategies are one of the most important challenges and decisions for today’s IT service providers. Pricing strategies for IT services have traditionally focused on covering costs, achieving desired margins and meeting the competition. These pricing schemes range from simple approaches, easily copied by competitors, to complex models with high management costs. In order to be successful in today’s competitive business world, the service providers need to define their pricing strategies by considering the customer’s perceived value from the service they receive rather than using traditional cost-based pricing strategies. This paper surveys literature on IT services pricing and presents a value-based approach to effectively price IT services. 1. Introduction The pricing decision is one of the most critical decisions that a firm can make whether planning the introduction of a new information technology (IT) service or repositioning an existing IT service. No tool in the marketing toolbox can either increase sales or reduce demand more quickly than pricing strategy. Pricing strategies for IT services have traditionally overemphasized cost-related criteria at the expense of the value of the service to the customer [34] [54]. Cost- based pricing strategies are focused on creating short- term value for the service provider. Conversely, value- based pricing focuses on the customer’s perception of the value of the service, not on service costs only (see Figure 1). The goals are focused on setting prices that facilitate the development of customer relationships that can create long-term value for the customer, which, in turn, enables the achievement of the service provider’s financial and strategic objectives. From a marketing perspective, the goal of pricing strategy is to assign a price that is the monetary equivalent of the value the customer perceives in the product while meeting profit and return on investment goals [41]. This paper posits the view that the traditional cost-based approach to IT service pricing is typically short-term, tactical in nature, and places the interests of the provider over the interests of the customer. Conversely, pricing approaches based on the customers’ perceptions of value are strategic and long- term in nature since they are focused on monetizing the service value perceptions from each customer through the pricing mechanism [21]. Firms that understand the strategic role of pricing and utilize a systematic approach to setting prices, by understanding how customers value service alternatives and arrive at prices that they are willing to pay, can make better decisions throughout the service development and implementation process. Figure 1. Cost-centric pricing compared with customer value-based pricing Services, whether they are knowledge and labor intensive (e.g. personal services, consulting, medical, education, software engineering, etc.) or dependent on IT infrastructure have the following shared characteristics: - Relatively intangible primary components that cannot be easily transported as goods - Perishable components unable to be stored for later use - Higher levels of customer contact that lead to higher instantaneous demand for a service - Non-standardized components - Simultaneous production and consumption [5][65] The emerging definition of IT services leverages these characteristics while seeking to systematize services and overcome some of the service challenges (in terms of transportability, storage, and standardization) in service delivery environments. Therefore, IT service providers seek to integrate tangible products such as hardware and software with relatively intangible services such as maintenance, Proceedings of the 42nd Hawaii International Conference on System Sciences - 2009 1 978-0-7695-3450-3/09 $25.00 © 2009 IEEE