Article Review

Article Overview

Companies have used cost-based pricing strategies, which enable them to cover costs. However, new strategies such as value based pricing model should be used by service providers to remain competitive.  Goal of the article is to develop a value based pricing strategy to improve custom relationship that can create long-term value for the customer.  Article conducts literature review on cost-based pricing strategy, and to find out characteristics that would affect value based pricing model.

The article starts with giving overview of cost based IT services pricing strategies such as Flat pricing, Tiered pricing, Performance based pricing, User-based pricing and Usage-based pricing from existing literature. Article tries to find out necessary characteristics that need to be considered to develop value based pricing strategy. Company should understand the customer value drivers for the market segment. Article identifies the categories to gauge customer value: They are Economic value, Performance value, Supplier Value, Buyer Motivation, and the Buying Situation. Article also presents different pricing strategies based on objectives of the firm such as Differential, Competitive and Product-service line pricing. It also lists out pre-purchase characteristics of customers that exist to enable the firms to use different pricing strategies: They are search costs, reservation prices, and transaction costs.

The article lists out value based pricing strategy such as Penetration pricing strategy, Skim pricing strategy, and Hybrid pricing strategy, and groups different cost and value based pricing strategy based on customer value perspective. Article quotes Dixit et al [1] to list out information technology enhanced pricing strategies (ITEPS) to encompass movement of IT industry to service-centric approach from a product-centric one. ITEPS uses the same differential, competitive and product-line pricing to provide guidance to price service oriented business model. It also lists out categories to combine current IT based pricing strategies such as Monthly Subscription fee, Free and Free, but not free, Up-front licence fees, and Pay per use. The article concludes by presenting a framework of value based approach which considers customer value, objectives of the firm, and pre-purchase characteristics for pricing IT service.

Key Learning Points

The article explains us about one of the important concept of marketing tool that is pricing strategy. The article gives overview of key topics from existing literature on IT services pricing, then it presents value-based pricing strategy that focuses on customer’s perception of the value of the service. Article suggests cost based pricing strategy is short term in nature and puts interest of the company over its clients for the reason to propose a new value based pricing strategy. It gives us with insights on IT services being moving towards a more service-centric approach as the reason for need of a new value based pricing strategy.