Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
481291 | European Journal of Operational Research | 2008 | 16 Pages |
This article examines how performance-contingent pricing schemes with long-term statistical performance guarantees can be applied to many IT services. We study two forms of performance-contingent pricing, with rebate proportional to failure rate and fixed rebate for below-threshold performance. We show that threshold-performance contingency pricing can increase both profits and fairness (customers who receive higher benefits pay higher effective price) relative to standard pricing. But an even better solution is to offer a menu of performance guarantees: this can increase the firm’s profit and segment the market. Only service providers whose performance level is sufficiently better than the industry standard can benefit from this pricing mechanism.